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Home Smart Investing 3 Stocks I Will Be Avoiding

3 Stocks I Will Be Avoiding

There are many stocks, including blue-chip companies, that are trading at cheap valuations as a result of the coronavirus.

But this does not mean that they automatically qualify as bargains.

It’s important that you sift out the wheat from the chaff.

Some companies could be seeing a permanent, structural shift in the industry they are operating in, such that the economics of the business are no longer as attractive as they used to be.

Others may just be suffering from temporary financial troubles and will be able to bounce back once the crisis has passed.

Stocks in the former category are known as “value traps” as they may appear cheap but do not possess attractive characteristics that qualify them for long-term investment.

Personally, there are three stocks that I am avoiding for now.

Unless there is a radical change in either the business environment or corporate strategy, I am inclined to continue to eschew them.

Singapore Airlines Limited (SGX: C6L)

Singapore Airlines Limited, or SIA, is Singapore’s flagship airline and operates brands such as Singapore Airlines, SilkAir and Scoot.

Worldwide lockdowns, a ban on air travel and border closures have resulted in SIA grounding the bulk of its fleet during April and May.

In late-March, the airline announced a massive rights issue to shore up its balance sheet as the group faces its greatest challenge since incorporation.

Although some flights have been restarted, it’s still an uphill task for the airline to climb back to pre-pandemic levels.

Moreover, SIA and Scoot are now granting refunds for passengers to cover trips departing before the end of August.

This is in line with the view that mass travel bookings are unlikely to resume anytime soon, as the airline industry continues to reel from the adverse impact of COVID-19.

New measures to assure passengers of safety and cleanliness could also be a new normal for airlines, with SIA pledging to perform more regular and thorough cleaning of aircraft, including the toilets.

SIA could be permanently and adversely impacted by the coronavirus, denting its revenue stream while bumping up its overall cost structure.

Singapore Post Limited (SGX: S08)

Singapore Post is a postal service provider that also deals with e-Commerce logistics and mail solutions in Singapore and 19 other markets.

Although full fiscal year 2020 revenue declined by 0.7% year on year, underlying net profit remained flat at S$100.2 million.

The worrying aspect of the earnings report centres on the Post and Parcel segment, which contributed 56% of group revenue.

The segment faces a double-digit percentage decline in letter volumes, and although e-Commerce growth volumes were healthy, they formed just a small portion of the segment’s total revenue base.

Although Post and Parcel segment revenue declined by just 1.1% year on year, its operating profit plunged by 23.2% year on year.

Singapore Post is also trying to recover from poor investments that it made in the US, namely in e-commerce businesses TradeGlobal and Jagged Peak, both acquired back in 2015.

These two acquisitions incurred significant losses for the group and had to be impaired to the tune of S$98.7 million in the 2019 fiscal year.

After a reduction in its total dividend from S$0.035 to S$0.027 and a lack of a viable long-term strategy, prospects continue to look bleak for the postal provider.

StarHub Ltd (SGX: CC3)

StarHub is one of Singapore’s three largest telecommunication companies (telco).

The group offers mobile, broadband and cable TV services.

StarHub reported a weak set of numbers for its first quarter 2020 earnings report.

Revenue fell 15.2% year on year, operating profit declined by 17.8% year on year, and net profit was down 25.7% year on year.

The group is also facing pressure for its mobile and pay TV divisions.

Its mobile services market share declined by two percentage points from 26% to 24%, while average revenue per user (ARPU), a measure of its ability to earn more per customer, declined for both pre-paid and post-paid users.

Pay TV division is seeing subscriber attrition, falling from 394,000 as of 31 March 2019 to 327,000 as of 31 March 2020.

ARPU is also falling for the division, falling by nearly 21% year on year from S$48 to S$38.

In short, the telco has not been able to arrest this decline in both its financial and operating performance.

With the new provisional 5G licence being awarded, it may have to cough up even more cash for capital expenditures, further straining its balance sheet and decreasing its free cash flow generation capability.

Want to know what stocks we like for our portfolio? See for yourself now. Simply CLICK HERE to scoop up a FREE copy of our special report. As a bonus, we also highlight 6 blue chips stocks trading at a 10-year low. But you will want to hurry – this free report is available for a brief time only.

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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.

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