Beware of a Bad Earnings Quarter

Article Excerpt

Stocks that are low-priced in relation to earnings, book value or assets are sometimes called “value” stocks. But there may be reasons why these “value” stocks trade at such low prices. For example, the company may operate in a cyclical business. A low price earnings or price-book ratio may just reflect investors’ belief that earnings will fall or even disappear in the future. Steel is an example of a cyclical industry. Steel prices remain high, but have weakened lately, due to lower levels of oil and gas drilling, construction activity and demand from North American automakers. Customers are also using up inventories in anticipation of lower prices. IPSCO trades at a low price/earnings multiple. The stock has moved down in price lately from its record highs reached last year. We still like its long-term outlook, but in a situation like this, one bad quarter of earnings could spook investors and knock the stock’s price down further. IPSCO INC. $106 (Toronto symbol IPS; SI…

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