What is Happening to the Downer EDI Share Price?

Downer EDI [ASX:DOW] is a diversified contractor, providing services to clients in the transport, engineering, utilities, technology and mining sectors. This exposure to mining helps explains why the DOW share price has been under pressure for the past few years.

What’s happening to Downer’s share price?

Today, Downer’s stock price fell around 8% by mid-afternoon, to $3.45 per share. The fall came on the back of an announcement that Downer had lost its contract to continue mining at Christmas Creek, an iron ore operation owned by Fortescue Metals [ASX:FMG].

From September 2016, FMG will undertake the mining and processing of the ore itself, instead of getting a contractor like DOW to do it.

Today’s share price fall calls into question the recovery that has been underway for the past few months. DOW didn’t quantify what the loss of the contract means for earnings in the 2017 financial year, so this uncertainty might keep pressure on the share price in the short term.

You’re likely to see the shares head back towards support (see chart below), at around $3.25, in the coming weeks.

Downer EDI share price 05Apr16

Source: BigCharts

What now for DOW?

The loss of one contract isn’t the end of the world for Downer. It is a large diversified company and has many different earnings streams. However, in a difficult and competitive marketplace, this news will ensure sentiment towards Downer remains negative for the short term.

On the plus side, Downer is a good company with a reasonably attractive valuation. Apart from the cyclical headwinds some of its divisions are experiencing, from a long term perspective it’s worth investing in.

But I would steer clear for the time being. As you can see from the chart above, the DOW stock price is in a prolonged downtrend. I never like to buy a stock that’s trending down.

It is close to support though, so further downside may be limited. The question is how long will you have to wait for a share price recovery? It could be a while, which is why I’d avoid it for the time being.

Never assess a stock’s fundamentals without looking at the chart too. Combining fundamental analysis with charting can yield powerful results.

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Greg Canavan
Editor, Markets and Money


Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

 


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