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3 Big Investing Lessons From Noble Group Limited’s Stunning Collapse

Commodities trader Noble Group Limited (SGX: CGP), once a proud blue chip stock in Singapore’s market until it got kicked out of the Straits Times Index  (SGX: ^STI) in March 2016, has seen its stock price undergo a stunning collapse over the past five years.

Source: S&P Global Market Intelligence

There are important investing lessons in this incredible episode that has seen Noble Group destroy S$6.42 billion in shareholder value. Here are three:

1. Be very careful when you a find a company that has a combination of the following traits: (a) An inability to consistently generate operating cash flow, (b) an inability to consistently generate a profit, (c) a weak balance sheet that’s loaded with debt, and (d) the presence of a low return on equity for an extended period of time.

Back in 10 March 2016, I published an article titled 2 Reasons For Long-Term Investors To Be Cautious About This Blue Chip Stock. The article was about how I thought Noble was a risky stock for investors because it had displayed the four traits I mentioned above.

The concerns I shared in my 10 March 2016 article were not new. Back in 27 January 2015, I wrote about similar issues with Noble in the article Here’s Why Noble Group Limited Is a Blue Chip Investors May Want to Avoid.

Based on today’s price, Noble’s stock has collapsed by 95.9% and 90.1% since 27 January 2015 and 10 March 2016, respectively.

2. Peter Lynch once said, “Sometimes it’s darkest before the dawn, but then again, other times, it’s always darkest before it’s pitch-black.” A stock that has already crashed can still go on to collapse even further if its business fundamentals does not improve. Noble’s experience is a case in point.

An investor who saw Noble just six months ago in 26 December 2016 may have thought there would not be much room to fall further since the stock was already down by 85% from 26 May 2012 as the table I shared earlier shows. But, from 26 December 2016 to today, Noble’s stock price has still declined by a very painful 73.9%.

Back in 26 December 2016, Noble had negative earnings of US$2.60 per share. Today, its earnings are at a negative US$0.16 per share. Although Noble had managed to shrink its losses over the past six months, it has still not managed to return to profitability. In fact, management warned recently that the company would likely not be generating a profit until at least 2018 or 2019.

3. Stocks with low valuations can still end up being a complete disaster if their business fundamentals are in shambles. Take a look at Noble’s price-to-sales (PS) and price-to-book (PB) ratios on the following dates: 26 May 2016 and 26 December 2016.

Source: S&P Global Market Intelligence

On both the dates mentioned, Noble had really low PS and PB ratios. Yet, as we’ve already seen, the low valuations could not protect the company’s stock price from sinking.

American politician Rahm Emanuel once said, “You never let a serious crisis go to waste.” This disaster at Noble Group has produced great investing lessons. Don’t let it go to waste.

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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 companies mentioned.