Welcome to December, Foolish readers. It seems appropriate to start the month's first week in review with a link to our Top Stock Picks for December, which is a collation of our writers' favourite ideas to buy right now.
Elsewhere in the market, trading was characterised by several massive falls, and a couple of premature exits from the S&P/ASX 100 (INDEXASX: XTO) and S&P/ASX 200 (INDEXASX: XJO) indices. The ASX 200 ended the week down 1.1%.
Here's what you need to know about:
Dick Smith Holdings Ltd's (ASX: DSH) share price collapsed more than 50% in a single day on Monday after a surprise $60m write-down on inventory and the disturbing announcement that management could not guarantee the company would hit its previous profit guidance. Following the write-down, Dick Smith is expected to sell millions of dollars of goods at below cost prices, which Gerry Harvey, of Harvey Norman Holdings Ltd (ASX: HVN) characterised as 'bad news'.
Dick Smith shares also experienced a disastrous exit from the ASX 200 index yesterday, following its quarterly rebalance (shares will actually exit the index on 18 December). This could lead to even more selling pressure as fund managers get out of the stock.
Slater & Gordon Limited (ASX: SGH) shares enjoyed a relatively peaceful week after last week's 50% decline, ending the week up 65% (although still down on last week). The fall in its share price saw the stock dropped from the ASX 100, although its share price recovery was enough to keep it in the ASX 200. Where its share price will go from here is unknown, although as I wrote here the law firm looks unlikely to go broke even if 2016 cash flow falls short of management's guidance.
Spotless Group Holdings Ltd (ASX: SPO) was yet another stock to experience a major decline, ending the week down 43% after it reported that profit growth has slowed as a result of tighter economic conditions and tender decisions being delayed or deferred. Shares now trade below the price they were offered at in May 2014.
At least part of the fall seems to be investor nervousness regarding the group's financials, similar to that experienced by holders of Dick Smith and Slater & Gordon. Like Dick Smith, Spotless Group is also a recent private equity IPO and investors are worried it could struggle in a similar way.
BHP Billiton Limited (ASX: BHP) subsidiary Samarco received a $7.2 billion lawsuit (50% owned by BHP and 50% by Vale SA) from the Brazilian government for costs related to environmental contamination, clean-up, and compensation after the recent dam collapse. The eventual cost to BHP is unknown – and the miner may well settle out of court for a lesser fee – but half of $7.2bn isn't an insignificant expense.
With those problems and commodity prices still weakening (hurting profitability), BHP looks too expensive to buy right now, despite trading at its lowest prices since 2005.
Last but not least, staff analyst Mike King wrote an educational article during the week on why Return On Equity (ROE) is a dud valuation which readers may find informative.
