Top stock picks for the upcoming year are always carefully analysed by investors, but what about the worst performing stocks from the year before? Heavily sold-down stocks that bounce back can provide lofty gains for those with keen stock picking skills. So with this in mind, at the bottom of the article is a table with some of the worst performing stocks from 2012, complete with percentage returns in 2012 as well as one-month performance in 2013.
(table at the end of the article)
The Price to Book Ratio is a favorite tool of bargain hunters and 7 of the 10 stocks in our table are trading below book value. Although you’d expect share price declines of 50% or more would drive down the P/B, not all companies are trading below book value. As always, there is more than one number needed when analysing companies. With a P/B of 3.13, Coalspur Mines (CPL) merits further attention when you consider that analysts predict 30% earnings growth over the next two years. So let’s dig into each of these companies to see if we can understand what went wrong and what the odds are for a turnaround.
Share market participants apparently think the worst is behind A-REIT FKP Property Group (FKP). Its share price was up close to 45% in late January and is holding on to a 35% gain in the first trading week of February. Here is a one-month price chart comparing FKP to the ASX All Ordinaries Index, the XAO:
FKP’s primary business is retirement villages. The company also has assets in residential, commercial, and industrial real estate as well as managed funds and investment operations. The current dividend yield of 9.1% is deceiving as it reflects the battered share price. Dividends paid in FY 2012 were $0.153 per share, down from $0.164 the previous year. The 2012 yield was 7.4% and the 2011 yield was 4.3%, reflecting the higher share price at that time.
Concerns over the future of the residential property market hit FKP hard in 2012 and the retirement of its long time director didn’t help matters. Many Australian REITS went into the GFC with massive debt and were consequently crushed. FKP is still struggling with outsized debt levels, with current gearing over 190%. Company management claims they are “reinventing” FKP, selling off residential and commercial assets to pay down debt and refocussing on its core business, retirement properties. A capital raise netting about $208 million in September of 2012 will help reduce operating costs and bring down debt somewhat. However, the current buzz may be related to the potential spin-off of the company’s retirement business. An analyst at BA-Merrill Lynch recently downgraded the stock to UNDERPEFORM based on uncertainty surrounding FKP’s change in focus, including the potential de-merger of the retirement business and major asset sales. S&P Capital IQ puts the company’s book value per share for the most recent quarter at $6.35 per share. This one may be a bargain.
Considering the collapse of the price of iron ore and lower coal prices in 2012, its hardly surprising that half of the ten worst performers of 2012 were miners. Falling commodity prices hit small to mid cap stocks the most as funding issues add to the wall of worry. Aquila Resources (AQA) has a market cap of $1.17 billion but is still considered a mid-cap stock due to comparison against the outsized market caps of major miners like Whitehaven Coal (WHC) at $2.96 billion and Fortescue Metals (FMG) at $15.16 billion.
Aquila’s problem is not its current debt but difficulties in raising funding for expansion plans. The company is in the process of shedding its interest in some of its coking coal operations to focus on Queensland based Eagle Downs coking coal mine as well as expansion of iron ore operations in West Pilbara. The Eagle Downs project is jointly owned with Brazil’s Vale and the two companies are engulfed in a legal battle over its stgelopment. Aquila’s share price was up about 12% last month. On 01 February 2013 an analyst at JP Morgan downgraded the stock to UNDERPERFORM due to the price hike. On 04 February Aquila announced that iron ore expansion in West Pilbara would be put on hold at least until June 2013, sending the share price downward. The stated reason was funding problems. This is a high risk investment. Here is Aquila’s one month price chart:
Media Company Ten Network Holdings (TEN) is losing advertising revenue in a shrinking market – Free TV. Ten Network’s share of the dwindling Free TV advertising market fell 5% in 2012 while publicly traded rival Seven Group Holdings (SWM) saw an increase of 2%. However, the important number here is the 3% decline in the overall advertising market for FREE TV.
TEN operates in a sector under pressure, and as such the company went into a trading halt in December 2012. Despite this, the share price rallied in early 2013. Here is the chart:
What happened? Speculation that government easing of federal Free-to Air licensing regulations could pave the way for TEN to merge with national radio and regional TV broadcaster Southern Cross Media Group (SXL). Nevertheless, the excitement has faded somewhat as struggling NINE Network gets snapped up by a group of US Hedge Funds with the possibility of taking the company public in 2014. Analysts are bearish on the stock with both Macquarie and CIMB Securities handing out SELL recommendations on the company.
Mirabella Nickel (MBN) is based in Perth and trades on both the ASX and the TSX (Toronto Stock Exchange). It is a single commodity company – nickel mining – with a single operating mine located in Brazil. The company successfully raised capital in May 2012 and aggressively cut costs to combat the impact of declining nickel prices. The share price got a bit of a bump in the first trading week of February as it announced a successful renegotiation of a US$50 million debt facility with Brazil based Banco Bradesco. Considering the rising tide across so many other ASX stocks in early 2013, it just seems there are better opportunities around than MBN. Here is the company’s one month price chart:
Tiny West African focused gold and copper miner Gryphon Minerals (GRY) has a market cap of $160 million. The company is another of 2012’s big losers that started out well in 2013. As of 01 February 2013 both Macquarie and Credit Suisse have OUTPERFORM recommendations on the stock based on the potential of its Banfora gold project. The company has no debt and had successful capital raises in late 2011 ($58.5 million) and late 2012 ($31.3 million), but a feasibility study for the Banfora Project released on 05 February 2013 stated the company would need access to another $200 million to bring the mine into production. Coupled with the gradual decline in the price of gold over the last six months, the news sent the share price south. Here is the company’s one month price chart:
Investors with risk tolerance would do well to note the positive drilling results on the Banfora Project to date. Resource quality and reserves saw Deutsche Bank and Citi issuing BUY recommendations on the stock in 2012.
Perth based Coalspur Mines Limited (CPL) is yet another single commodity stock but at least this one has two potential projects underway. The company’s exploratory assets are located in Alberta, Canada and according to Coalspur management the “flagship” Vista coal project could become “one of the largest export thermal coal mines in North America.”
The company’s stated plan is to export the coal to the Asia Pacific region. However, estimated costs for project completion approach C$1 billion. The company announced a U$300 million debt facility with EIG Global Energy Partners, with more funding efforts in progress.
Considering the declining price of coal and the competitive threat posed by abundant shale gas production in the US, it is no wonder this company’s share price has bounced back and forth like a tennis ball over the past year. Here is its yearly price chart, compared to the XAO:
While rising energy demand in the future is not in doubt, the role coal – especially thermal coal – will play is very much in doubt. The combination of rising demand for cleaner sources of energy with increased availability of natural gas as an alternative does not bode well for the long term future of coal. In the short term, the 30% earnings growth forecast may come to pass. In the longer term all investors who are thinking King Coal still offers investment opportunities would do well to study the following chart from the World Bank charting the price of Australian thermal coal through July 2012:
Alacer Gold (AQG) is headquartered in the US but trades on both the ASX and the TSX. The company has exploration and production facilities in Australia and Turkey. The company’s market cap is $442 million with low gearing at 14.4% and hefty analyst expectations forecasting 39.1% earnings growth over the next two years. The company began trading as Alacer Gold in early 2011 as a result of the merger between Anatolia Minerals and Avoca Resources. “Gold bugs” who can tolerate the risks associated with junior miners may find this company intriguing as despite its recent birth, major Australian analysts are largely bullish on the stock.
Deutsche Bank, UBS, Macquarie, and CIMB Securities all have BUY or OUTPERFORM recommendations on AQG, based largely on expansion plans at the company’s Copler mine in Turkey. Here is its price chart;
Perth based Gindalbie Metals Limited (GBG) has a portfolio of exploratory iron ore assets in Western Australia but the company’s immediate future rests with the Karara iron ore project, a joint venture with Chinese steel and iron ore giant, AnSteel. With a market cap of only $386 million, the partnership with AnSteel gives Gindalbie a decided funding advantage. The company has no long term debt following successful capital raises in 2011 and 2012. The Karara mine is in production and the company expects to reach 5 million tonnes yearly production by FY 2014.
Major analyst opinion on the stock ranges from moderately skeptical to bullish, despite the dramatic 2 year growth forecast of 98.3%. On 16 January 2013 BA Merrill-Lynch upgraded GBG to a BUY recommendation based on better iron ore prices and production growth. UBS maintained a BUY rating and target price of $0.38 in the belief the Karara expansion is proceeding according to plan. JP Morgan is the major skeptic with an UNDERWEIGHT recommendation and a “wait and see attitude” regarding the successful ramp up at the Karara project.
Despite the strong balance sheet with zero debt and $40 million total cash, the share price of Gindalbie has continued its slide from 2012 into 2013. Here is the company’s one month chart:
Investors may be focusing on Gindalbie’s single commodity focus and dependence on increasing Chinese demand for steel.
Saracen Mineral Holdings Limited (SAR) is a junior gold miner with producing mines in the goldfields of Western Australia. The company has strong financials, with $20.3 million total cash against only $3.06 million in debt and gearing of 1.47%. In November 2012 the company announced the securing of debt facilities from Macquarie, leaving the company with enough funding to expand production towards 190,000 ounces per annum between 2014 and 2015 without capital raisings.
On 07 February 2013 the company announced record January gold production at one of its mines putting the company on a path to achieve its ambitious guidance of between 125-135,000 ounces for the full year. The January result follows a record setting performance in December of 2012. This is a stock to watch. Here is the company’s one month chart:
The old adage – where there’s smoke, there’s fire – does not always apply to sharemarket investing. Sometimes the “smoke” is nothing more than rumours deliberately floated to drive a company’s share price up or down. Determining whether perceived “smoke” is rumour or advance warning of an impending fire can be a difficult task.
Energy World Corporation Limited (EWC) potential rests in construction of LNG facilities and its operations in that sphere have come under question from a series of articles appearing in the Sydney Morning Herald. On 01 October 2012 the company filed an official response to the latest SMH article published on 29 September. During 2012 the company received 5 “speeding tickets” from the ASX in reaction to volatile movements in the share price. There may be no fire there, but investors need to do their research.
2012 % Change
2013 % Change
2 Year Forecas. Earnings Growth
FKP Property Group
Alacer Gold Corp
Energy World Corp
Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.