Sometimes, the fastest-rising stocks are actually the riskiest. Although you might envy somebody who bought such a stock near its all-time lows, it doesn’t mean you should buy today. First, stocks that rise a lot in a short timeframe tend to give investors a bumpy: if you’d bought early, would you have had the stomach to hold it all the way up? Second, sometimes companies just stop performing well at a fundamental level, and then what you see is a declining share price that never reverses.
In this article, I’ll explore one Canadian company with a hidden risk factor that may make it not worth its rapidly rising stock price.
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SNC Lavalin/AtkinsRealis
AtkinsRealis (TSX:ATRL) is a Canadian contractor that was formerly known as SNC Lavalin. The company’s stock has really been ripping this year, up an astounding 72% over the last 12 months. It’s no secret why this is happening: the company’s sales are up 26% over that period. Earnings (AKA profits) are down over that period. However, the company turned profitable in the most recent quarter, a period in which it earned $0.36 per share. That was up from $0.01 in the same quarter a year before. That’s a 3,500% one-year growth rate — it’s not surprising that the stock is up after that happened. This is a rate of growth you don’t see very often.
Granted, a big part of why it was possible was because ATRL’s margins were so tiny in the year-ago quarter. As Warren Buffett says, size is the anchor of performance. AtkinsRealis had only $1.2 million in total profit in the year-ago quarter — if that sounds like a lot to you, remember that we’re talking about a major corporation here — so it’s not surprising that ATRL grew tremendously. Think of a college student whose best-paying job ever was fast food, who graduates and then becomes a doctor. That’s the kind of growth that can happen when you start from a small base.
A bad reputation
Having established that ATRL is growing rapidly as a company and seeing its stock price appreciate, it’s time to look at that “risk factor” mentioned at the start of the article:
It’s the company’s reputation.
Back when it was known as SNC Lavalin, the company was embroiled in a major scandal, where it was accused of bribing a Libyan official by paying him $1.9 million in travel expenses. The scandal reached the highest level of Canadian politics, as Justin Trudeau was accused of covering for the company. In the end, SNC Lavalin admitted wrongdoing and got fined.
Foolish takeaway
Peter Lynch once said, “Companies only change their names when they get married or have a bad reputation to cover for.” In AtkinsRealis’s case, it’s clearly the latter. The company has not married (i.e., merged with or been acquired by another), so its name change was obviously to direct investors’ attention away from its misdeeds. This company is performing well financially this year, but the aura of corruption around it leaves intelligent investors feeling skeptical.
