Just as Kenny Rogers said in his famous song The Gambler – You gotta know when to hold 'em, know when to fold 'em – in investing it's important to realise firstly, that you won't profit on every investment you make and secondly, you don't have to make your money back the way you lost it.
Given the number of mining service stocks on the ASX there is a fair chance that many investors have been caught out with one or more stocks in their portfolio that they wish they didn't have. As is the case generally when an investment is 'underwater', there are likely to be some investors in mining service stocks who are currently holding and just waiting for the share price to return to "breakeven" before getting out.
To those underwater investors the following warning from analysts at Morgan Stanley might have them think twice. The warning is equally relevant for investors scouring the beaten-down mining service sector looking for opportunities.
The Australian Financial Review has reported that Morgan Stanley believes 2014 is shaping up to be an even tougher year for engineering and construction stocks than 2013. In fact the broker suggests that with declining capital expenditure the worst may still be in front of, not behind, the sector. Morgan Stanley singled out four stocks which it thinks may have earnings estimates that are still too optimistic. The companies were: Monadelphous Group Limited (ASX: MND), Leighton Holdings Ltd (ASX: LEI), Transfield Services Limited (ASX: TSE) and UGL Limited (ASX: UGL).
Morgan Stanley's view appears to be backed up by comments from the manufacturer of Caterpillar machinery, Caterpillar Inc (NYSE: CAT). Caterpillar recently stated that it doesn't expect a turnaround as it heads into 2014 – it has laid-off nearly 10,000 workers in the past 12 months. Given that Seven Group Holdings Ltd (ASX: SVW) owns Caterpillar franchises in both Australia and China, investors should keep Caterpillar's comments in mind when analysing Seven Group.
Foolish takeaway
Often the best time to invest is when the near-term outlook is scary. This could indeed be the case when it comes to mining services, but then again sometimes it's right to be scared!
