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Has the mining services sector been set up for another fall?

If investors cast their minds back to March this year they will no doubt remember the dramatic fall in the share prices of many mining service firms that ensued over the next few months to July.

Stocks such as Ausdrill (ASX: ASL), Bradken (ASX: BKN), Decmil (ASX: DCG) and Imdex (ASX: IMD) fell 73%, 35%, 27% and 49% respectively over the period from the start of April to the start of July. This fallout from the acknowledgement that the the mining boom had peaked in terms of capital expenditure led to a swift and painful correction on the outlook for many firms which service the resources sector.

While the market is regularly prone to overreaction on the way down and the way up during cycles, the speedy bounce by some mining service stocks would now appear to be questionable. Since July 1, the above four have rallied 60%, 35.5%, 29% and 13% respectively.

With Ausdrill entering a trading halt earlier in the week, advising that “it is reviewing its current operating performance and ongoing challenging market conditions, which are weaker than expected”, it begs the question whether some investors have priced in expectations that are too rosy for some mining service stocks.

Although Bradken appears to be doing a sound job of navigating through a tough economic climate, its recently released earnings guidance suggests the company will be working hard just to bring in a flat earnings result this financial year. Meanwhile, Imdex’s first-quarter trading update reported that revenue was down 28% and earnings before interest, tax and amortisation were down 84% on the prior corresponding quarter.

Foolish takeaway

Picking winners in the stock market is never easy, but picking them from within a depressed sector is arguably even harder. For many investors, it can be better to focus on companies that are experiencing a tailwind as opposed to a headwind.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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