The bear market has taken many by surprise due to its speed and ferocity. Many stocks have been viciously sold down to multi-year lows.
Value investors who are looking for bargains will probably salivate at the buffet of cheap stocks available.
A word of caution though, that not everything that is cheap is a bargain.
To use an analogy, I recently purchased a cheap power bank for under S$10. However, to my dismay, the device broke down shortly after my second usage. .
As you can see, cheapness does not always mean quality.
Investors will need to delve a bit deeper into the company’s industry, financials and long-term prospects to ensure that it can bounce back post-crisis.
With that in mind, here are three stocks that I intend to avoid during this crisis even though their share prices have been severely beaten down.
Singapore Airlines (SGX: C6L)
Singapore Airlines, or SIA, needs no further introduction. Singapore’s national carrier is experiencing its worst crisis in decades as the group has had to slash capacity by 96% due to stringent travel curbs and border closures.
Though SIA’s share price has hit a 21-year low recently at S$5.36, my view is that this still does not compensate investors for the risk of a potential cash crunch.
The carrier is 55%-owned by Temasek Holdings. Temasek will also certainly step in should the airline run out of cash, but a potential cash call may mean massive dilution for existing shareholders.
In short, SIA may continue to survive, but shareholders may still get wiped out in the process.
APAC Realty (SGX: CLN)
APAC Realty operates is a leading real estate services provider that holds the exclusive ERA master franchise in 17 countries within the Asia Pacific region. ERA Realty is one of Singapore’s largest real estate agencies with more than 7,000 salespersons.
APAC Realty was listed back in September 2017 but saw its share price suffer subsequently as the Government introduced property cooling measures in June 2018.
The US Federal Reserve has made an emergency rate cut to bring the Federal Funds Rate to almost zero per cent. The move has resulted in mortgage loans being priced more cheaply as the local banks here adjust their loan rates downwards.
Normally, a rate cut should be positive for the property market. However, with the Covid-19 measures in place restricting movement and negatively impacting businesses, this would result in cash flow issues for many individuals.
The investment property market may thus face more stress in the months to come. This will result from a combination of people having difficulties servicing their mortgages plus a rise in vacancies due to job losses add to stress in the industry.
APAC Realty may continue to suffer from low transaction volumes and muted demand for investment property for the foreseeable future.
SembCorp Industries (SGX: U96)
SembCorp Industries, or SCI, is a conglomerate with three main divisions — energy, marine and urban development. It operates across multiple markets globally, has an energy portfolio of over 12,600 megawatts, along with total assets of over S$23 billion and 7,000 employees.
The group has reported underlying year-on-year profit growth of 12% in its Energy business. Despite this, I continue to believe that its Energy business will face stress from an over-supply of power in many countries.
SCI may also need to write-down the value of more of its assets as the Energy division faces continued challenges.
Though its share price has plunged to a more than 10-year low of S$1.53, I believe this is merely a reflection of both the Energy and Marine industries coming under enormous pressure, without much relief in sight.
Furthermore, SCI has seen two CEO changes in the last four years. Tang Kin Fei, who was with the group for 30 years, retired in March 2017 to make way for Neil McGregor, an executive from Temasek International.
Just last week, SCI announced that Wong Kim Yin, who is currently the Group CEO of Singapore Power, will succeed McGregor from July 2020.
The changes in the CEO make it hard for SCI to tie down a long-term strategic plan, as each executive will run the company based on his own individual management style.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.