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Following Noble Group Limited’s Massive Quarterly Loss, What Can Investors Learn From This?

Commodities trader Noble Group Limited (SGX: CGP) released its 2017 third quarter results yesterday evening. It was ugly.

Revenue for the reporting quarter was down by 18% year-on-year to US$1.46 billion. And because cost of sales declined by just 6% to US$1.48 billion, the company’s loss attributable to shareholders widened dramatically from US$28.1 million a year ago to US$1.17 billion. At the time of writing, Noble’s shares are trading at US$0.25 apiece.

At this level, the company’s stock price is down 7% from yesterday, down by 36% from just a month ago, down by a stunning 88% over the past year, and down by an even more incredible 95% over the past two years.

Were there early signs that Noble would be such a painful experience for investors? Yes, there were.

The red flags

Back in 27 January 2015, I wrote an article titled Here’s Why Noble Group Limited Is a Blue Chip Investors May Want to Avoid. In the article, I pointed out some problematic signs I saw with Noble’s business. The company had (1) an inability to consistently generate operating cash flow and free cash flow; (2) an inability to consistently generate a profit; (3) a weak balance sheet that’s choked with debt; and (4) the presence of a low return on equity for an extended period of time.

More than a year later, on 10 March 2016, I wrote 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 problematic signs I mentioned above.

Then, on 29 May 2017, I penned an article with the title After Collapsing By 70% In A Month, Would Noble Group Limited Interest Warren Buffett’s Investing Mentor? This article looked at Noble through a 10-point investing checklist developed by the late Benjamin Graham. Graham was a successful investor, the mentor of billionaire investor Warren Buffett, and the author of two classic investment texts, Security Analysis and The Intelligent Investor.

Graham’s checklist touched on three important areas: (1) A stock’s valuation; (2) the strength of the stock’s balance sheet; and (3) the stability and growth in the stock’s historical profits. When I wrote the Graham-checklist-article on Noble, the company failed the checklist badly because of its weak balance sheet and highly volatile profits.

When my January 2015, March 2016, and May 2017 articles on Noble were published, the company had stock prices of S$10.25, S$4.25, and S$3.05 respectively. Those are way higher than the current trading price of Noble’s shares.

The key takeaway here is that Noble had poor business fundamentals for a long time even back then, which is a red flag for investors when thinking about the potential for the company’s stock to deliver good long-term returns. There are more lessons we can glean from the Noble debacle.

More lessons

The legendary investor 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.

An investor who saw Noble just six months ago on 10 May 2017 may have thought there would not be much room for its share price to fall further since the stock was already down by 90% from say, three years ago on 10 November 2014. But, from 10 May 2017 to today, Noble’s stock price has still declined by a very painful 81%.

In the first quarter of 2017, Noble had negative earnings of US$129.3 million. As mentioned earlier, Noble delivered a loss of US$1.17 billion in the third quarter of 2017. The company’s business performance has deteriorated significantly over the past six months.

Another important lesson is that stocks with low valuations can still end up being a complete disaster if their business fundamentals are in shambles. In the table below, take a look at Noble’s price-to-book (PB) ratios and stock prices on the following dates: 10 November 2016 and 10 May 2017.


Source: S&P Global Market Intelligence

On both the dates mentioned, Noble had really low PB ratios. Yet, the low valuations could not protect the company’s stock price from sinking.

A Foolish bottom-line

American politician Rahm Emanuel once said, “You never let a serious crisis go to waste.” This disaster at Noble has produced great investing lessons and we should not let it go to waste.

Noble’s experience is a great reminder for investors to focus on things such as the strength of a company’s balance sheet, and its ability to consistently generate positive free cash flow and profits. It is also a reminder for investors that a stock can still collapse even after it has fallen hard, and that low valuations can still result in painful losses if a stock’s business fundamentals are poor.

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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 owns shares in Noble Group Limited.