Today a popular investment advice service called BWX a Spec Buy after the company announced an equity raising and a subsequent share price plunge of 40% ($1.17 to 70c)

As a subscriber I thought I should do my own due diligence.

The first cut for me is always the fundamentals, starting with the ROE. After all, ROE is the best return you can expect from a business if it were appropriately priced.

One look at the ROE chart and the red flag is flying! Next I look at some analyst earnings forecasts which has BWX continuing on a ROE of circa 5% over the next 3 years. Usually, this would be enough for me to look elsewhere for a higher quality business. However since this was a recommendation I’ll take the next step…valuation.

Lets assume it’s a value play. Using McNivens StockVal formula assuming APC = 5%, 70% of earnings reinvested (RI), Shareholder equity of $2.03 (E), and a required return of 10% (RR):

V = (APC/RR x RI + D)/RR x E

= 66c

BWX has traded as low as 66c per share today and theoretically should give you a 10% return going forward.

But this still doesn’t interest me as it’s not a high quality business, particularly when it needs to raise equity to keep going on a projected ROE of 5%!

I have several better quality business on my watch list that should provide me with much higher returns than BWX over the next 3 years.

BWX doesn’t make it to my watch list!