Here are five falling knives Foolish investors should avoid.
Only for the adventurous
Anglo American (LSE: AAL) currently trades at a forward P/E of 12.3 and the shares support a dividend yield of 7.1%, so the company looks attractive on a valuation basis.
However, Anglo is struggling with a high level of debt and falling commodity prices. Theres no telling how much lower commodity prices could fall, and further declines could inhibit Anglos ability to pay down debt, finance its dividend and cover interest costs. That said, Anglo is taking drastic action to cut costs, targeting $1.5bn per annum of cost savings over the next 18 months.
So, for the adventurous investor, Anglo could be a high-risk play on the recovering commodity market, but there are better investments out there.
If youre searching for value in the oilsector,Premier Oil (LSE: PMO) should be avoided. That said, if you already own Premier theres no reason to sell up just yet.
The company recently reported first-half results that showedoperating cash flow of $513m over the six months and a $214.7m pre-tax loss triggered by a$385m write-down.
Still, while Premier is generating cash and growing production, other oil explorers such asGenelEnergycould prove be better bets on the oil market as they have stronger balance sheets and lower production costs.
Premier Farnell (LSE: PFL) just cant seem to get things right. Between 2011 and 2014 the companys revenue has contracted by 3% and net profit has contracted by a third as margins come under pressure. Management has reacted by trying to cut costs, but costs arent falling fast enough.
Premier Farnell issued another a profit warning at the end of July and management has announced yet another review ofthe groups operations.
Premier Farnell may look cheap as it currently trades at a forward P/E of 9 and supports a dividend yield of 8.4%, but the company could be a value trap.
EVRAZ (LSE: EVR) surprised the market earlier this year when the company announced a $375m stock buybackafter cutting debt and boosting profit. Whats more, the company announced that it had astrong positive cash flow and the liquidity to meet payment deadlines on its debt for the next two years.
But steel prices have fallen by around a quarter since EVRAZ announced this cash return. EVRAZ will now need as much cash as possible to maintain a certain degree of financial flexibility in a volatile and uncertain market.
EVRAZ could find itself in a sticky position now that it has returned $375m to investors. Management might have wasted shareholder cash by buying back stock.
Theres no other way of putting it,Lonmin (LSE: LMI) is in trouble. The worlds third-largest platinum minerhas half a billion dollars of finance facilities coming up for renewal next year and has no cash to meet obligations.
Management is currently working with banks on a possible debt refinancing or restructuring. However, lenders patience is likely to be running thin as Lonmin was granted $300m of debt relief back in 2012. Lonmin could end up becoming another Afren.
Buy and forget
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