Insights

Riverstone is a High-Quality Company But I’m Not Buying Now

It’s risky for investors to buy Riverstone Holdings Limited (SGX: AP4) shares now. Here’s why. – Danger avoid headwind

Riverstone Holdings Limited (SGX: AP4) is a Malaysia-based company operating in two key areas of the rubber gloves industry: cleanroom gloves and medical gloves.

I previously wrote about why Riverstone is a high-quality stock. Yet, I did not recommend investors buy its stock and here’s why I think that.

Manic speculation

The recent Covid-19 outbreak has devastated businesses across the globe, with a few exceptions such as technology and healthcare industries.

Riverstone, a supplier of gloves, operates in the healthcare industry and has benefitted from the virus outbreak.

A quick overview of Riverstone’s latest financial performance saw that revenue jumped 16% to RM 279 million (US$65.5 million) while net profit surged 54.3% to RM 47 million, confirming speculation that the Covid-19 outbreak is beneficial to its business. So far, so good.

Riverstone’s share price, understandably, has appreciated substantially – reflecting this new reality. Still, the surge in its share price has far exceeded (in my opinion) the underlying fundamentals. Consider this.

From the low of about S$0.70 in mid-March, the share price has more than quadrupled to S$3.25!

Though this pales in comparison to other glove stocks like UG Healthcare Corporation Ltd (SGX: 41A) which was up by more than 1000% during the same period, it still signals investors’ exuberance on the company.

To this end, many retail investors have recently been “investing” in glove stocks, pushing shares of companies like Riverstone and UG Healthcare to all-time highs.

As an investor, we need to be prudent in our investment decision-making and avoid overpaying for stocks. Personally, I believe buying Riverstone’s stock now is anything but prudent.

Valuation

As a value investor, I will always try to buy a company’s stock at a price that is lower than its intrinsic value. Still, that doesn’t mean that I will buy cheap, low-quality companies. Instead, I’m looking to buy good quality business at a reasonable price.

In the case of Riverstone, I think it is a quality business. Yet, its valuation is just too high for my liking, especially after the recent run. Here are some numbers to consider.

At S$3.25, Riverstone is trading at a trailing price-to-earnings (PE) ratio of more than 55x. Historically, the company has usually traded at a PE ratio of below 20x.

Though some investors may argue that Riverstone’s current valuation is justifiable owing to its strong performance amid the virus outbreak, I would prefer to stay on the sidelines.

Foolish takeaway

As an investor, we should buy stocks when others are fearful, and sell stocks when others are greedy.

Presently, I think the market participants are greedy for Riverstone’s stock, and hence, it’s probably not the best time to buy it now.

More reading

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Lawrence Nga does not own shares in any companies mentioned.

The Motley Fool Hong Kong Limited(www.fool.hk) 2020

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