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Ray Titus asked 10 months ago

Hi Team,
 
Would love your thought process on this scenario. Trying to understand better on how to make a more rationale decision in investment.
 
Company A is a service company for O&G industry. Was purchased in 2015 and has been declining ever since. Now standing at 65% unrealised profit. Looking at increment in oil price as well as increase in revenue from 2018 onwards although still at net loss, it seems might be able to be profitable again in 2021 with more jobs coming in for them. Currently (Q42020 report) trading at -1.79 PE , 0.45 PS and 0.43 PB. All are way below average.
 
Company B is an insurance company that within the same period; share price has been dropping as well around the same percentage as Company A if purchased during same time. After some research, there is a potential of growth with limited downside as price is quite affordable. Have not purchased any yet. Currently (Q32020 trailing) trading at 11.4 PE, 0.7 PS and 0.6 PB which are also trading way below average.
 
With current limited fund of say 50,000 ; which would be a better investment and what is the best metric to decide it on.

Thank you.
 

1 Answers
Victor Chng answered 10 months ago

Hi Ray,

We are not licensed to give any recommendation on any purchases. Below is all based on my personal opinion on those limited information that you have given.

Predictability is very important in investing which is the reason why in IQ we taught about invest in recurring or predictable businesses. O&G companies are highly prone to oil price movement which made them hard to predict. The only time they can do well is when oil price is high. The key is also whether the company can survive before the oil price increase. Hence, let say you will to hold on to your investment, it may take years to recover back to breakeven point. Hence, there is an opportunity cost to it. Insurance companies are generally a much better industry as compared to O&G as they have recurring in their revenue. The key for the business is to make underwriting profit.

 

If you are talking about valuation metric then price to book is good for both of the companies.

Ray Titus replied 10 months ago

Hi Victor,

Thank you for your prompt reply. Understood on the recommendation limit as well as the takeaway on predictability as well as opportunity cost.

Much appreciated.

Victor Chng replied 10 months ago

Welcome Ray :)