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Forge Group secures $40 million order book. Warren Buffet’s advice still timely.

It’s been a wild ride for Forge Group (ASX: FGE) shareholders in the past month as the stock’s share price plunged from over $4 per share down to a low of 28 cents. The plummeting share price has been in response to Forge’s announcement on the 28 November that it would be forced to take a $127 million profit writedown and outlay $45 million in cash on projects related to the Diamantina power station and the West Angelas power station. Even more worrying than these developments was management’s comment that the company’s liquidity position would be challenging and that it had been forced to seek the support of its bankers.

This state of affairs is obviously concerning for shareholders, however the beaten down share price does have the potential to offer value, although it could also be a value trap, making the risk profile higher than many investors would be comfortable with.

At the time of the announcement Forge had a contracted order book of $1.8 billion and today the company announced a further $40 million in new Asset Management works in North America. The appeal of Forge’s Asset Management business is that the contracts offer a recurring revenue stream for the firm rather than a reliance on continually winning new project work.

The market certainly was excited to see the firm issuing some positive news, with the share price initially jumping nearly 30% before pulling back to be up around 21% by mid-afternoon on Tuesday.

Foolish takeaway

While a bounce from recent lows can entice investors to not ‘miss out’, a review of the mining services sector will remind investors that Forge is not the only stock to have fallen heavily. Ausdrill (ASX: ASL), Boart Longyear (ASX: BLY) and Imdex (ASX: IMD) are all down over 60% too. For conservative investors it is important to remember Warren Buffett’s sage advice – “Rule number one, don’t lose money. Rule number two, don’t forget rule number one.”

Owning quality dividend paying stocks is a sound way to grow your wealth and to avoid losses.

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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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