Today I am looking at three market monsters investors should avoid during spooky season.
Anglo American
Another week, another round of bad news for diversified mining colossus Anglo American (LSE: AAL). Iron ore — a market from which the business generates 27% of total earnings — slumped to three-month troughs under $50 per tonne as fears over Chinese steelmaking activity, combined with rampant production rises the world over, kept prices on a southerly bent.
The mining industry remains content to keep on supplying the market with unwanted material despite falling prices, and Anglo American itself hiked output at its Minas-Rio asset by 60% in July-September from the previous quarter, to 2.9 million tonnes. And metallurgical coal output, another one of the company’s crucial yet battered markets, advanced 8% quarter-on-quarter to 5.5 million tonnes.
Anglo American is embarking on a frantic strategy of cost-cutting, spending scalebacks and asset sales to shore up the balance sheet as resources prices struggle. But these measures are clearly no march for a backcloth of collapsing revenues, a view that is shared by the City — indeed, Anglo American is expected to suffer a colossal 49% earnings drop in 2015 alone. Even though this results in a low P/E ratio of 10.9 times, I believe Anglo American remains a highly-unappealing stock choice as commodity markets deteriorate.
WM Morrison Supermarkets
Supermarket fiend Morrisons (LSE: MRW) has seen its share price rattle 20% lower from March’s peaks as investor sentiment has seeped away. And with good reason — the firm’s efforts to court customers back through earnings-crushing price cuts continues to fail miserably, and like Tesco and Sainsbury’s the comany has failed to come up with any tangible improvements to either brand or customer service to defend its market share.
Indeed, latest Kantar Worldpanel statistics showed Morrisons’ take of the market slump to 10.8% during the 12 weeks to October 11, down 10 basis points from a year earlier thanks to a 1% sales slide. And the situation is unlikely to improve any time soon as the grocery sector’s ‘price wars’ intensify, and discounters like Aldi and Lidl as well as premium chains such as Waitrose aggressively expand.
With Morrisons’ foray into the convenience store sector having spectacularly failed, and its online operations also hampered by massive competition, it is hard to see how the Bradford business will recover from here. The City currently expects the retailer to endure a 10% earnings fall in the year to January 2016, resulting in an unjustifiably-high P/E ratio of 18.3 times. And I believe further earnings falls should be expected in the years ahead.
Tullow Oil
Like Anglo American, I believe earnings at Tullow Oil (LSE: TLW) are set to experience worsening pressure as oversupply in the ‘black gold’ market intensifies. The value of Brent oil slipped to its cheapest since the summer earlier this week at $47 per barrel, and given the steady stream of poor data coming out of China, it will come as little surprise to see prices sink to fresh multi-year lows.
Fellow fossil fuel giants BP, BG Group and Shell have published poor results this week on the back of a deteriorating oil price, with the latter’s $7.4bn net loss during July-September representing its worst performance for donkey’s years. And news of further capital expenditure cuts by the industry’s major players hardly suggests that oil prices are about to leap higher any time soon, either.
The situation is naturally perilous for Tullow Oil, whose balance sheet carried net debt of $3.6bn as of June — up almost a third from a year earlier — and whose revenues fell 35% during the first half of 2015, to $820m. And a period of sustained crude price pressure is likely to further undermine the economic viability of its African assets like the TEN Project in Ghana, due for maiden oil in mid-2016. I believe the risks far outweigh the potential rewards at energy producers like Tullow Oil.