Today I am looking at three stocks with terrifying risk profiles.
John Wood Group
Oil services provider John Wood (LSE: WG) steadied investor nerves in Thursday trading after announcing a six-year contract with Saudi Aramco to provide “greenfield and brownfield engineering services, procurement, and construction management support” for new offshore projects in the Arabian Gulf. The amount was not disclosed, but the deal — which includes the option for two three-year extensions — will go some way to improving the firm’s revenues peformance.
However, I believe that the growing supply/demand imbalance washing over the oil market makes the Aberdeen business a perilous stock selection. Fears over a prolonged period of subdued crude prices is forcing companies the world over to row back on their exploration plans and reduce spending in order to conserve cash, a worrying scenario for the order book at services plays such as John Wood.
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This pessimistic view is shared by the City’s number crunchers, who expect John Wood to record earnings dips of 5% and 4% in 2015 and 2016 correspondingly. These projections leave the company changing hands on P/E multiples of 13.4 times for this year and 13.7 times for 2016. I would consider a figure closer to 10 times to be a better reflection of the risks facing the business, and believe share prices could retrace below this level should oil prices tank again.
Royal Bank of Scotland Group
Embattled financial institution Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) drew further negative publicity this week after another failure by its rickety IT framework. This time an astonishing 600,000 payments simply went ‘missing’, drawing the ire of customers and raising the prospect of yet more penalties — UK regulators fined the bank £56m in November after 6.5 million users were locked out of their accounts back in 2012.
But this is only one problem facing Royal Bank of Scotland. A programme of destructive asset stripping has significantly reduced its revenues outlook, particularly as its core operations continue to underperform. And the cost of the bank’s massive cost-cutting scheme — not to mention the steady drain on the balance sheet in the form of misconduct charges — is further reinforcing its position as a hugely unappetising stock selection, in my opinion.
Although earnings are anticipated to leap from 0.8p per share last year to 28p in 2015, this still leaves Royal Bank of Scotland dealing on a P/E ratio of 12.1 times. This is by no means fist-bashingly awful, but is expensive compared with that of many of its industry rivals such as Lloyds and Barclays which are on much stronger footing. I reckon investors should follow the government and illustrate little appetite to hold shares in the bank.
Quindell
I have long been concerned about the investment prospects of Quindell (LSE: QPP), the colossal amount of intrigue that has gone on over the past year making me wonder if anyone has control of the steering wheel. Still, such issues seem not to have concerned the market and the stock has jumped more than 200% since the turn of the year to current levels around 125p.
Still, I believe that there is little cause for this breakneck ascent, and that the telematics specialists could be in line for a massive share devaluation. Much has rightly been made of Quindell’s previous conduct, from the questionable share dealings of board members last year through to concerns over its accountancy practices. But with the firm having revamped its boardroom with blue-chip alumni, many believe that the tech play is finally putting to bed its reputation as a basket case.
I am not so convinced, however, and not just because Quindell is still to appoint a chief executive to push it back in the right direction. After the sale of its Professional Services Division to Slater & Gordon, questions remain over just how the company will generate earnings, while the state of the firm’s balance sheet remains a huge bone of contention. I believe that investors should brace themselves for more bad news when Quindell hopefully releases its 2014 results later this month.
