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1 Thing Investors Should Bear In Mind With Cheap Value Stocks

I’ve seen many investors who think buying stocks with low price-to-earnings ratios can help guard against losses.

But here’s the thing: Even established blue chips with low valuations have seen their stocks suffer sharp declines.

Marine engineering and utilities conglomerate Sembcorp Industries Limited (SGX: U96) is an illustrative example. At the start of 2014, Sembcorp Industries, which is a constituent of Singapore’s stock market barometer, the Straits Times Index (SGX: ^STI), had a PE ratio of just 12 at a share price of S$5.49.

That kind of PE is low in the absolute and also low when compared to the market. For instance, the Straits Times Index’s average PE from 1973 to 2010 is 16.9.

But today, Sembcorp Industries’ stock price is at S$2.58, a decline of 53% from where it was at the start of 2014 despite the low PE back then. One big reason here is the poor performance of Sembcorp Industries’ business. The company’s earnings per share of S$0.449 at the start of 2014 has sunk by 58% to just S$0.189 today.

When investing, bear in mind that a stock is not immune from a big decline even when it has a low PE ratio. The eventual performance of the stock’s underlying business matters a great deal too.

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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 does not own shares in any companies mentioned.