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Is Noble Group Ltd A Bargain Right Now?

Commodities trader Noble Group Ltd (SGX: CGP) has been a sorry sight in the stock market for a long time.

Over the past five years, its stock price has essentially been moving in one direction – down. The decline has also been fierce, so much so that today’s price of S$0.21 represents a fall of 98% from five years ago. Given the precipitous decline, would Noble be a bargain at the current price?

There is no easy answer, but we may be able to find some clues from an investing checklist that the legendary investor Peter Lynch shared in his book One Up On Wall Street.

Lynch ran the US-based Fidelity Magellan fund from 1977 to 1990 and racked up an incredible annualised return of 29%. In One Up On Wall Street, Lynch wrote about a general checklist he had used when he was searching for investing opportunities. Let’s run Noble through the checklist and see what turns up.

1. The Price-Earnings ratio: Is it low or high for this particular company and for similar companies in the same industry (generally, low PEs are preferred)?

Right now, Noble does not have a PE ratio, as its net income over the last 12 months is negative.

2. What is the percentage of institutional ownership? The lower the better.

This criterion was added by Lynch because he thought that companies that were not noticed by institutional investors (big money managers) tended to make for better bargains.

In the case of Noble, as of 28 February 2017, it had a number of institutional investors who held stakes of 5% or more, each. These institutional investors include China Investment Corporation, the Orbis group of funds, the Franklin Resources group, and entities under insurance giant Prudential.

3. Are insiders buying and whether the company itself is buying back its own shares? Both are good signs.

Over the past six months, there have been no instances of insider buying, or the company repurchasing shares.

4. What is the record of earnings growth and whether the earnings are sporadic or consistent?

Here’s a record of Noble’s earnings over the past decade from 2006 to 2016:

Source: S&P Global Market Intelligence

It turns out that Noble has not been able to consistently generate a profit. What’s also striking is that Noble’s earnings per share had essentially been falling since 2009.

5. Does the company have a strong balance sheet?

Based on its latest financials as of 30 September 2017, Noble has a net debt position of US$3.25 billion (US$338.7 million in cash and equivalents, and total debt of US$3.59 billion). Not only does Noble have a huge chunk of debt, its net debt position is also triple its shareholders’ equity of US$1.04 billion.

A Final take

Noble fails all five of Lynch’s criteria. The company has no PE ratio to speak of, a high level of institutional ownership, no buybacks or insider buying, inconsistent profitability, and a really weak balance sheet.

Judging from the results of the checklist, Lynch probably would not be interested in Noble at all at the company’s current stock price. Also, the results show that Noble’s a really risky stock – investors who are interested in the company would need to be aware of the risks involved.

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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.