Looking For a Bargain? This Defensive Blue Chip Stock May Be One

As you may have heard, Singapore’s stock market has fallen hard in recent times. From a 52-week high of 3,550 points that was reached in mid-April, the Straits Times Index (SGX: ^STI) is now sitting 18.8% lower at 2,882 as of the time of writing (3:54 pm).

The fall in the index will also mean that many blue chip stocks – the 30 constituents that make up the index – have also tumbled of late. This could be a good opportunity for investors to snap up some discounts.

One blue chip stock which may be a potential bargain would be the engineering conglomerate Singapore Technologies Engineering Ltd (SGX: S63). At ST Engineering’s current price of S$2.87, it’s valued at just 17.3 times its trailing earnings.

Although ST Engineering’s present valuation is a premium to the price-to-earnings (PE) ratio of 11 that’s carried by the SPDR STI ETF (SGX: ES3) – an exchange-traded fund which tracks the fundamentals of the Straits Times Index – the conglomerate is actually near the cheapest it’s been since the start of 2010. You can see these in the chart below:

ST Engineering's price-to-earnings ratio (PE ratio) since start of 2010

Source: S&P Capital IQ

ST Engineering’s low valuation now carries the potential for a favourable mean reversion to occur in the future. A reversion to the mean in investing can manifest itself in how below-average (above-average) valuations tend to be followed by above-average (below-average) outcomes.

But, investors would still have to proceed with caution. As investor Ric Dillon once wrote:

“On the behavioural-finance side, one of many inefficiencies comes from people anchoring on the past. People assume something is cheap, say just because it hasn’t traded at such a low valuation for five or ten years. But that doesn’t matter, what matters is what will be.”

The future of ST Engineering’s business will be very important here.

ST Engineering's income growth table (2)

Source: S&P Capital IQ

Although investors may find comfort in how defensive ST Engineering’s business has been – as you can see in the table above, ST Engineering’ s profit survived the Great Financial Crisis of 2007-09 relatively unscathed – it’d still pay to carefully consider what lies ahead.

A Fool’s take

ST Engineering’s historically attractive valuation and solid track record of making profits are positive signs here. But if the firm’s order book starts dwindling and its business suffers, the share may still become an expensive mistake. It’d pay for investors to think carefully about the risks and rewards before any investing decision’s made.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any company mentioned.