Warning: Sirius Minerals’ share price isn’t the only threat to your wealth in 2018

Roland Head highlights a stock he’s avoiding and suggests a trading strategy for Sirius Minerals plc (LON:SXX).

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares of FTSE 250 funeral group Dignity (LSE:DTY) are down by 17% at the time of writing on Friday, after the Competition and Markets Authority (CMA) said it would launch an investigation into funeral pricing.

The two areas of concern identified by the CMA are “how prices have changed over time” and “whether the information provided by funeral directors on prices and services is clear enough.”

A problem for Dignity?

Dignity shares fell by 55% in January after the group admitted it was losing market share and would have to slash prices to remain competitive.

Should you invest £1,000 in Associated British Foods right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Associated British Foods made the list?

See the 6 stocks

Anecdotal evidence suggests that Dignity funerals are often more expensive than equivalent packages from independent funeral firms. The company’s figures show that its market share has been falling since at least 2004, but that this decline has accelerated since 2015.

Management propped up profits by raising prices and making more acquisitions. But this approach no longer seems sustainable. Analysts expect earnings to fall by about 40% this year.

The right time to buy?

January’s share price crash might mean that the stock is a contrarian buy. But I’m not convinced.

Firstly, I believe the company has too much debt. Net debt was £516.9m at the end of 2017, almost nine times after-tax profits of £57.8m. For a defensive business like this, I’d normally consider four times profits to be a prudent maximum.

Secondly, I don’t think that Dignity shares are cheap enough yet. Broker forecasts for 2019 put the stock on a forecast P/E of 17, with a prospective yield of 2%. For such a low-growth business, I’d want to see a P/E of less than 12. I’d continue to avoid this troubled firm.

Timing is everything

I’m more optimistic about the outlook for Sirius Minerals (LSE: SXX). Although the potash miner isn’t expected to produce any polyhalite until at least May 2021, it does seem to have the potential to become a highly profitable long-term business.

However, I wouldn’t rush to buy the shares at their current price. Before investing, I often like to look at a stock’s share price chart. What this shows for Sirius is that investors who have bought the dips on this stock have done pretty well. But investors who bought the peaks have done less well.

An investment at 20% in June 2015 has delivered a gain of about 70% in three years. That’s good, but not outstanding in a strong bull market. In contrast, buyers who picked up stock for 12p in February 2016 are already sitting on a profit of about 180%.

Wait for a dip

Sentiment towards Sirius is strong at the moment. But I believe another dip is likely at some point, as the market remembers the risks and long timescales of this project.

CEO Chris Fraser hopes to raise $3bn of debt this year to complete the project financing. As this cash is spent, I estimate that the enterprise value (market cap plus net debt) of Sirius Minerals will rise from around £1.5bn to about £3.7bn, even if the share price remains flat.

I think this is a fair valuation for this business at the moment. We are still several years away from production. Problems and delays may arise, and market conditions for fertiliser may not be so favourable when production finally begins.

To buy Sirius today, I’d be looking for a share price of no more than 25p.

But there may be an even bigger investment opportunity that’s caught my eye:

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won't want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we're giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Blue NIO sports car in Oslo showroom
US Stock

Is NIO stock an unmissable bargain below $4?

Jon Smith addresses some of the recent chatter about NIO stock and explains why he's not convinced now's the best…

Read more »

Black woman using smartphone at home, watching stock charts.
Investing Articles

£10,000 invested in Greggs shares today could deliver £363 in dividends in 2027

Greggs shares have dipped significantly over the past 12 months, but this has pushed the dividend yield way up, creating…

Read more »

Tesla car at super charger station
Investing Articles

More bad news! Is it now game over for Tesla stock?

Tesla stock is still trading at a mighty premium, despite more recent negative developments. Yet there are some bright spots…

Read more »

Engineer Project Manager Talks With Scientist working on Computer
Investing Articles

Down 29% in a year, meet the S&P 500 stock I’m considering buying June

UK investors might not be familiar with Danaher. But the S&P 500 stock is top of Stephen Wright’s buying list…

Read more »

Bournemouth at night with a fireworks display from the pier
Investing Articles

Up 45% with a P/E just over 12 – this FTSE 250 stock is on fire!

Harvey Jones is kicking himself for failing to buy this FTSE 250 stock last October. It’s been the perfect way…

Read more »

Group of friends meet up in a pub
Investing Articles

Down 50%, are Diageo shares a bargain in plain sight?

With the shares trading at multi-year lows, this writer examines the latest trading update from Diageo, together with its long-term…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

3 reasons to consider HSBC shares for passive income

Aiming to generate extra passive income? This writer thinks HSBC shares from the FTSE 100 index are worth a look…

Read more »

US Tariffs street sign
Investing Articles

£10,000 invested in Apple stock 3 months ago is now worth…

This writer is wondering if he should add Apple to his Stocks and Shares ISA portfolio while it's currently under…

Read more »