Today I am looking at three stocks which should send chills down the spines of most sensible investors.
Rio Tinto
With brokers persistent in taking the red pen to their global growth forecasts, I believe that commodities plays like Rio Tinto (LSE: RIO) (NYSE: RIO.US) remain at risk of severe and prolonged earnings weakness.
Shares in the mining giant have bucked their downtrend in recent weeks and are up 20% since mid-December, but I believe this is merely a ‘dead cat bounce’ as market balances in key areas continue to deteriorate. Although Rio Tinto and its major peers continue to ramp up production to record levels, this excess material is simply not being hoovered up by consumers — indeed, data this week showed iron ore sales to China slump almost 10% month-on-month in January to 78.6 million tonnes.
The City expects Rio Tinto to follow a 9% earnings slide for 2014 with an additional 26% dive this year, leaving the business trading on a P/E multiple of 12.2 times forward earnings, a decent number, if not spectacular, given the perilous state of its key markets. I believe that the firm’s profit forecasts could take a hammering should the global economy continue to toil.
Quindell
Well, just where does one start when discussing telematics play Quindell (LSE: QPP)? The business has taken a pasting during the past year — concerns over the firm’s profitability and cash position, and questions about opaque share dealings by the board and subsequent resignations, have seen shares concede more than three-quarters of their value since January last year.
And the head-scratching over just exactly what is going on at Quindell shows no sign of letting up. The company announced last month that it was in talks with Australian legal firm Slater & Gordon over the sale of certain assets, prompting investors to rightly speculate that its breadwinning legal services could be on the way out — this division alone accounts for half of Quindell’s total revenues.
The potential fire-sale has once again cast questions over the business’ balance sheet, and comes ahead of PwC’s report into Quindell’s financial health, which is due out in the next few weeks. Given the drastic nature of such a divestment, I am not alone in thinking that the investigation could make for terrifying reading.
Enquest
Like much of the oil sector, I believe that fossil-fuel producer Enquest (LSE: ENQ) remains a dicey pick for those seeking robust stock candidates. The company assuaged immediate concerns over its financial health last month as lenders eased covenants on the firm’s debt until the middle of 2017.
But the still-murky outlook for the oil market continues to cast a pall over Enquest’s financial health and earnings outlook. Bank of America-Merrill Lynch said today that it expects Brent to trade between $40 and $70 during the next 18 months, a poor omen for the firm — as Barclays points out, “a prolonged period of sub-$70 per barrel that extends into 2016 could see balance sheet concerns resurface,” worsened by Enquest’s position as a high-cost producer.
The number crunchers expect a falling oil price to cause Enquest to swing from an anticipated $134.4m pre-tax profit last year — itself down from $330.9m in 2013 — to losses of $14m in 2015. A strong turnaround is anticipated in 2016, as its Amla/Galia facility in the North Sea produces first oil, but should Brent prices remain in the doldrums Enquest could see any recovery go up in smoke.