Welcome to Tuesday, Foolish readers. Although the S&P/ASX 200 (INDEXASX: XJO) had a ho-hum day, falling 0.8%, a number of stocks were absolutely crushed as investors grew nervous about their future earning prospects:
Oil Search Limited (ASX: OSH) shares plunged 16% today after Woodside Petroleum Limited (ASX: WPL) formally withdrew its merger proposal this morning. Compounding the fall was the fact that Brent crude oil fell 5% to just US$40/barrel overnight, something that sent shockwaves through the market today.
Oil Search’s management was upbeat, restating that Woodside’s proposal ‘grossly undervalued’ the company. Oil Search is one of the more attractive stocks on the ASX, with a long growth pipeline, although I feel that at today’s prices it is still too expensive.
Santos Ltd (ASX: STO) also saw its share price decimated on the lower oil price, falling 12% to $3.35. Shareholders are still waiting for price relief that is unlikely to materialise as oil cartel OPEC continues to win back market share. Bets are also rising against Santos’ debt and strained cash flows, with roughly 10% of its total share float held for short sale.
Unlike Woodside Petroleum or Oil Search, Santos will have more difficulty growing or buying its way out of a slump, which means investors will be forced to wear very uncomfortable declines in profit and free cash flow in the near term.
However, Santos’ potential upside if the oil price recovers is likely among the greatest on the ASX.
Reffind Ltd (ASX: RFN) made a re-appearance today, losing 7.6% of its value to $0.61 after another 7% fall yesterday. Shareholders might consider themselves lucky though, since shares were down as much as 15% earlier this morning. Reffind and similar company 1-Page Ltd (ASX: 1PG) – down 10% today – are both the victims of heavy selling as investors realise the companies’ values far outstrip their revenues.
Indeed, Reffind made just $100,000 in its most recent quarterly report – and the company is valued at $33 million. Investors buying now are effectively hoping that enough contracts materialise to see revenues jump tenfold – or more! – in order to justify the share price. Both Reffind and 1-Page are highly speculative investments.
Slater & Gordon Limited (ASX: SGH) shares lost 7% to $1.02 as the market continues to revalue them in light of proposed regulatory changes in the UK, uncertainty regarding the stock’s ability to meet its financial obligations, and an unceremonious exit from the S&P/ASX 100 (INDEXASX: XTO) index earlier this week.
While the stock looks cheap on a number of metrics including its Price to Earnings (P/E) ratio and forecast cash flow, I believe investors would be better served by waiting for the next results release before buying in. There is simply too much uncertainty to make Slater & Gordon an attractive investment right now.