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A Bet On Noble Or Is It On Borrowed Time?
Tradeable, Tradeable Ideas | 20 May 2014
By: Lim Si Jie
Articles (169) Profile
  1. Noble Group’s low profitability stems from its low margins that has been below the industry benchmark.
  2. Recent movement in share prices is due to buyers’ demand.
  3. Whether Noble Group becomes part of the STI will affect its future share price, in either direction.

Noble Group is a global supply chain manager of agricultural and energy products, metals and minerals. Although Noble Group is not an investment bank, it is very much involved in the commodities market. Noble Group operates in three segments: Agriculture, energy and metals.

Commodities are basic needs in our everyday lives. Every one of us consumes those commodities in one way or another. However, making a considerable profit from the commodities business may be a different thing all around.

Too Damn Low, Profits For FY13
The claim of low profitability is not without proof.

Despite boasting revenue of $123 billion in 2013, net income for Noble Group was a mere $299 million. This equates to a net profit margin of only 0.24 percent. It is much lower than the industry benchmark of 2.63 percent. Even Noble’s five year average net profit margin stands at only 0.64 percent.

The main reason for the low profit margin is due to the high cost of sales and services for Noble’s core operations, which stood at $121 million in 2013. As reported in the annual report, the bulk of the cost is from the purchase of commodities as inventory.

Although the P/S ratio (0.07) of Noble may seem very attractive at one glance, investors need to take note that its P/E ratio (30.51) is much less appealing due to the low net profit margin.

Why The Steep Ascent?
There are two main reasons for Noble’s share prices to climb to a new resistance level at $1.32.

Looking at Noble’s RSI and Stochastic, they are giving investors signals that Noble is overbought in recent weeks. This is in conjunction with breaking previous resistance level at $1.08 and $1.19. However, share prices have been kept high at the high despite RSI and Stochastic already moving away from overbought regions. This can be attributed to the rather positive volume that is accompanying the share price rise.

The recent move to delist Olam and CapitaMalls Asia from SGX would see two new stocks taking their place in the Straits Times Index.

If that is the case, many financial institutions, namely index funds that track the STI could adjust their holdings of Noble in the upcoming months. This adjustment would be made to ensure that their holdings is in line with individual counter weights on the STI.

Rising On Borrowed Time
A technical analysis of Noble's chart
A technical analysis of Noble’s chart

A point which I want to bring to your attention is the bearish harami pattern that formed at the high of Noble’s recent move. The first long green candlestick forms in the direction of the trend. It signals that significant buying pressure remains, but could also indicate excessive bullishness.

Immediately following, the small candlestick forms with a gap down on the open, indicating a sudden shift towards the sellers and a potential reversal.

In my opinion, Noble’s share price is currently rising on borrowed time.  It is always a dilemma whether to take profit and pocket the cash or hold our emotions to achieve better gains.

In this instance, I prefer to go with my emotions and pocket some cash.

Editor’s Note: Noble has been on the STI for some time and the text in the previous edition of this article was ambiguous about this. We have since adjusted the article to better reflect the writer’s thoughts. We tip our hats to readers, Lasse RL and June Kuah, for pointing this out.

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Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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The Shares Investment editorial team welcomes constructive feedback on our coverage and content. We would also be delighted to answer any questions on the above article. Leave us a comment below, and we'll get back to you shortly!

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