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Investors, Here’s Something To Beware Now

Stocks in Singapore have fallen hard these past few months. As an example, at its current level of 2,615 points (as of 10:36 am), the Straits Times Index (SGX: ^STI) has slipped by 26% from its 52-week high of 3,550 that was reached in April 2015.

As a result of the decline, many blue chips in Singapore – the 30 stocks that make up the Straits Times Index – now also carry valuations that look enticing in relation to history.

Some notable examples include Global Logistic Properties Ltd (SGX: MC0), Sembcorp Industries Limited (SGX: U96), Keppel Corporation Limited (SGX: BN4), Wilmar International Limited (SGX: F34), and Genting Singapore PLC (SGX: G13).

The table below compares their current price-to-book (PB) ratios with their respective historical average PB ratios over the past five years; as you can see, the quintet all carry significantly depressed PB ratios when stacked up against history.

Global Logistic Properties, Sembcorp Industries, Keppel Corp, Wilmar International, Genting Singapore PB ratios
Source: S&P Capital IQ

Falling stock prices and low valuations can make it appear like bargains are aplenty now. But in times like these, there’s something investors have to beware – not every stock that has fallen steeply to a low valuation will end up being a bargain.

The bargains that aren’t

Back in 2009, the Straits Times Index had bottomed-out at 1,455 points on 10 March after falling by over 60% from its peak as a result of the Great Financial Crisis. As already mentioned, the index is currently at 2,615 points, so there has been a sizeable rebound of 80% since it reached its crisis-lows.

But according to S&P Capital IQ, of the 566 Singapore-listed stocks that were listed back in 10 March 2009 that the data-provider keeps tabs on currently, 173 are actually trading at prices at least 30% lower than where they were when the Straits Times Index reached a trough during the financial crisis. Not every stock which falls will rebound.

Some particularly egregious examples are Global Yellow Pages Limited (SGX: AWS), China Fishery Group Limited (SGX: B0Z), and Pacific Andes Resources Development Ltd (SGX: P11). These three stocks were actually carrying really low valuations on 10 March 2009 as you can see in the table below:

Global Yellow Pages, China Fishery, Pacific Andes Resources' share price, EPS, and valuation table
Source: S&P Capital IQ

But as a result of their falling profits since 2009, they still ended up being big losers after all (see table just above).

A Foolish take

Stock market declines do bring about legitimate bargain-hunting opportunities. But, not every stock that has fallen to a low valuation will necessarily be a good investment – it’s often the case where the performance of the stock’s business is what really matters over the long run.

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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.