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These stocks can offer more than 50% returns in a year

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Usually, the stocks are beaten down for a specific reason. Therefore, it is not a good strategy to buy the stocks when they are falling. However, at times, fear takes over, sinking the stocks to mouth-watering levels, from where the downside risk is limited but the upside opportunity is huge. So, without further ado, let’s look at the two beaten-down stocks that offer a good upside potential.

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Key points

  1. Och-Ziff Capital Management stock price has plunged following its bribery scandal
  2. Its assets under management has fallen about 33%
  3. However, things look to be turning around as AUM increased marginally in August
  4. Rite Aid has sold 1932 stores to Walgreens Boots Alliance for $4.375 billion
  5. The remaining stores and business of Rite Aid are valued much higher than its current market cap
  6. It is a good takeover candidate

Och-Ziff Capital Management (NYSE: OZM)

OZM is a multi-style hedge fund, which has mostly outperformed its peers over the past decade.

Due to its outperformance, its assets under management (AUM) increased from $22.6 billion in 2006 to $47.5 billion in 2014. Between 2009 and 2014, its AUM doubled. However, since then, we find a consistent drop in its AUM. But why?

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The firm was charged with bribing officials in various African nations, including the Libyan Gaddafi regime. As a result, after a two-year investigation by the Securities and Exchange Commission and the Department of Justice, the African subsidiary of the firm, OZ Africa, pleaded guilty and a settlement was reached, where OZM agreed to pay a fine of $413 million.

This led to a series of withdrawals by various pension funds, foundations, and endowments. As a result, the AUM of the company fell by about 33% from July 2015 to May 2017.

The hedge fund’s main sources of revenue are management fees and incentive fees. The management fees increases as the AUM increases, while the incentive fees depends on the fund’s performance.

Therefore, if we believe that OZM will turnaround, it will have to generate better returns than its peers to attract new capital, which will increase its AUM. If the hedge fund is successful in doing this, it will earn more revenues and therefore signal a turnaround, which will reflect in its prices.

Withdrawals have abated

The company reported that its AUM increased to $32.3 billion as of 01 September 2017, an increase of approximately $0.3 billion since 01 August 2017. This shows that the hedge fund has been able to attract some capital, though small and is retaining its existing investors. Considering its strong history of outperformance, we believe that it will be able to attract new investors and increase its AUM

OZM’s latest performance of its three funds is given below.

Now, let’s see how this scandal has affected the price of the OZM.

Weekly chart

The stock is down about 80% from its 2014 highs. This shows that the investors have severely punished the stock due to the scandal. However, since touching a low of $2.15 in April of this year, the stock has started a base formation. Though the stock is unlikely to rally back to $14 to $16 levels in a hurry, it can easily start a recovery, which can carry the stock to about $4.78 levels within a year, which is a 48% rise from Friday’s levels.

Daily chart

The stock has formed a cup and handle formation, which will complete on a breakout above $3.22. This pattern has a minimum target objective of $4.3. However, once the stock breaks out of $3.8, it doesn’t have any major resistance until $4.8. Therefore, we recommend buying the stock at $3.25 with a stop loss of $2.6.

Risks involved

The investor sentiment can sour due to geopolitical reasons or due to the failed tax reforms in the US. A risk-off trade will reduce the possibility of increasing OZM’s AUM. OZM can underperform its peers, which will make it difficult to attract new investors.

Rite Aid Corporation (NYSE: RAD)

RAD is a pharmacy chain, which recently sold 1932 stores, including three distribution centers, and related inventory to Walgreens Boots Alliance (NASDAQ: WBA) for $4.375 billion on a cash-free, debt-free basis.

Even after the sale, RAD is left with nearly 2600 stores along with six distribution centers, pharmacy benefit manager Envision Rx, RediClinic, and Health Dialog.

After valuing the remaining business of RAD, we find that the stock price offers a good risk to reward ratio.

Our investment thesis

In its latest Conference Call, Darren W. Karst, SVP, CAO, and CFO of RAD said: “Over 70% of the stores we are retaining at our wellness or customer world locations and per store sales and adjusted EBITDA at these stores is higher than the current chain average”.

This shows that RAD has not been left with unprofitable stores.

On calculation, we find that Walgreens has paid about $2.26 million for each store of RAD. Therefore, if we assume the same valuation for the remaining 2600 stores, we arrive at a figure of $5.87 billion.

Another major business that Rite Aid holds is the pharmacy benefit manager (PBM) Envision RX. RAD had paid about $2billion while acquiring the firm back in 2015. Though the jury is out whether RAD had overpaid for the acquisition, we shall consider the existing market metrics to value it.

Envision Rx generates an income of about $6 billion. If we consider a pure play PBM, Express Scripts, the market values it at about 0.4 times of sales. Even if we take a conservative estimate of 0.3 times sales, we arrive at a valuation of about $1.8 billion for Envision Rx.

Adding the two, we arrive at an asset valuation of $7.67 billion.

The company has a total gross debt of $7.20 billion. Let’s assume that the company uses about $4 billion of the total cash received from the sales of its stores to pay down the debt. That leaves a total liability of $3.2 billion.

By deducting the total liability from the asset valuation, we arrive at a figure of $4.47 billion. The total outstanding shares of the company is $1.05 billion. Therefore, even if we take a conservative estimate, RAD’s shares should be valued at $4.25. That is a good 116% higher than the closing price of $1.96 on September 29.

A good takeover candidate

There are rumors that Amazon is exploring options to enter the pharmacy business. If it does, RAD can be a good fit for it to kickstart its operations. Even otherwise, RAD’s valuation is likely to attract  the private equity players or other suitors.

Though the management has not been able to put up a credible performance in the past many quarters, with a fresh cash infusion, they have numerous opportunities to turnaround the company.

What do the charts forecast?

Weekly chart

The weekly chart shows that the stock has been a huge underperformer. Every once in a few years, it rallies close to $8 levels and then gives back its gains. The long-term chart doesn’t show any trend in the stock. Let’s see if we can get any clue from the daily charts?

Daily chart

The stock has fallen from above $8.5 levels in January of this year to below $2 levels. The stock is in a strong downtrend and it continues to make new 52-week lows. We don’t want to catch a falling knife. Therefore, we shall wait for the price to stop making new lows for three days and then buy about 50% of our total allocation. Remaining 50% position can be added once the stock sustains above $2.2 levels. The stock should gain strength once it breaks out of $2.8. A move to $4 is likely within a year. We can keep a stop loss of $1.

Risks involved

RAD, with its reduced size, will find it difficult to compete with the larger players. The management doesn’t utilize the cash received from Walgreens effectively. Amazon or any other player doesn’t show an interest in buying out RAD, which will deliver a further blow to the sentiment. RAD can continue to dig itself into bankruptcy.

Important: Never invest money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



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4 Comments

4 Comments

  1. gullyfoyle

    October 4, 2017 at 9:19 am

    Interesting stuff as always Rakesh OZM seems ready for a decent cycle upwards. I don’t know enough about RAD’s industry to jump straight in, I’ll study the charts a little more but thanks for bringing the stock to my attention.

    What are your thoughts on the heavy buy volume on FMSA recently and the rumours of a buyout? Seems bullish to me, even though I have already sold 50% after that strong move.

    • Rakesh Upadhyay

      October 4, 2017 at 9:27 am

      Hello gullyfoyle,

      Thank you. The effort is always to try and find stocks that will offer decent returns with minimum risk.

      As you must have recovered most of your initial investment in FMSA, it would be a good strategy to wait for this acquisition news to play out. Rumors can do wonders to a stock.

      A rally to $6 and thereafter to $7.7 is likely. For now, let the remaining position ride. You can keep a trailing stop loss in a day or two, after watching the price action.

      With warm regards
      Rakesh Upadhyay

  2. idm2000

    October 15, 2017 at 4:19 am

    Thank you for the Article!
    what do you think about if Amazon selling drugs?
    Amazon considering selling online prescriptions
    and their decision is coming soon around thanksgiving day

    if they do, is there any chance to M&A with Rite Aid like whole food?

    • Rakesh Upadhyay

      October 15, 2017 at 5:50 am

      Hello idm2000,

      The rumors have been going on for quite some time about Amazon entering the business. However, the opinion is divided whether they will do so.

      Nevertheless, RAD certainly offers Amazon a quick way to gain a footing. Therefore, Amazon is likely to consider buying RAD, if it wants to sell drugs. However, looking at the fall in the price, the traders are not pricing that possibility, but, as we all know, it can change very quickly. Fundamentally, RAD looks to be undervalued, unless the RAD management wastes the money and the opportunity presented to them. It is worth a bet, but buy only after it stops falling. That might be around $1.6.

      With warm regards
      Rakesh Upadhyay

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Cryptocurrencies

Trade Recommendation: Stellar

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The price bounces from SMA50 which is a support line for the market. MACD lines support upward movement. Also we can draw a pennant chart pattern which also confirms further upward movement. If the price breaks the resistance line of the pennant, this pattern will be realized as a continuation pattern. It will give us an additional confirmation of the upward movement. Pending orders for buy should be placed at 0.035000 level with stop orders at 0.028000 level. The main profit target should be at 0.048000 level. The part of trade volume can be left for the higher target at 0.070000 level. If you don’t use leverage, recommended trading volume for this trade is up to 5% from your deposit.

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Market: STRUSD
Buy: 0.035000
Stop: 0.028000
Profit Targets: 0.048000

The trading signal is based on Poloniex chart.

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Cryptocurrencies

Trade Recommendation: Lisk

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A new attempt to catch a trend reversal. The price diverges with MACD and it gives us a buy signal on the falling market. DMI allows to open long trades. We should place pending orders for buy above the previous high at 0.000840 level. Stop orders must be placed below the support at 0.000680 level. Profit targets are 0.001200 and 0.001400 levels. The part of trade volume can be left for long run. If you don’t use leverage, recommended trading volume for this trade is up to 5% from your deposit.

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Market: LSKBTC
Buy: 0.000840
Stop: 0.000680
Profit Targets: 0.001200 and 0.001400

The trading signal is based on Bittrex chart.  

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Analysis

Buy FDS, PPC, BERY, and IIVI for the short-term

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The US tax reforms received a major boost on Thursday when a measure approved by the Senate, enabled the Republicans to proceed with the tax cuts, without the support of the Democratic party.  Suddenly, passage of the tax cuts looks more plausible.

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Key observations

  1. Positive news is flowing on the tax reforms front.
  2. Tax reforms are likely to boost the S&P’s earnings significantly
  3. The stocks are likely to remain buoyant in the final quarter of the year
  4. Buy FDS
  5. Buy PPC
  6. Buy BERY
  7. Buy IIVI

Goldman Sachs believes that if corporate tax rates are reduced from 35 percent to 20 percent, it will increase the annual per-share earnings of the S&P 500 by $15. Consequently, the stock market will look a lot less richly valued on a forward price to earnings basis.

With this bullish backdrop, the stock markets are likely to remain buoyant in the short-term. However, we don’t advise investing for the long-term at these levels. We believe that the markets will fall within the next few months, offering an opportunity to buy stocks at lower levels.

Therefore, we shall trade this market and attempt to ride the momentum. We have selected stocks that are making new 52-week highs because they have a favorable tailwind and are likely to participate in the rally, along with the S&P 500.

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So, without further ado, let’s check out the stocks.

FDS – Buy 185.76, Stop Loss (SL) 174, Target 204 and 216

Weekly chart

The stock’s history shows that it tends to rally for a few years and then enters into a shallow correction or consolidation. We find three such instances in the past decade. The stock has been in a consolidation since end-2015. Two attempts, one in September 2016 and the second in March 2017, failed to sustain the breakout.

However, the stock again broke out in end-September and extended the rally last week. It is likely to start a new uptrend now and we plan to hop along for a ride.

Daily chart

The stock broke out of the bullish ascending triangle formation on September 26. Thereafter, it faced resistance at the $184 levels, from where the bears attempted to sink the stock, back into the triangle.

However, the bulls provided support at the $176 levels and the stock broke out of the overhead resistance on Friday. It is now likely to rally towards its first target objective of $204. The pattern target on a breakout from the ascending triangle, however, is higher at $216.

Therefore, we recommend a buy on the stock at the current levels with a stop loss of $174. We don’t want to hang on to the stock if it falls back into the triangle once again. The stock has a risk to reward ratio of 1:1.5 at the first target objective and a ratio of about 1:2.5 at the second target objective.

PPC – Buy 31.04, SL 27, Target 37

Weekly chart

The stock rose sharply from end-2012 to end-2014. Thereafter, it corrected and entered into three-year long consolidation, during which, it remained range bound between $17 on the lower end and $27.5 on the upper end. PPC formed a double bottom at $17.3 levels and the pattern completed when the stock broke out of $27.5 in mid-August of this year. Subsequently, the stock completed a successful retest of the breakout levels of $27.5 and rose to multi-year highs last week. We, now, expect the stock to start a new uptrend.

Daily chart

The stock broke out of the overhead resistance on August 15. However, the stock faced considerable resistance following the breakout. It remained sandwiched between $28 and $30 for almost two months. Finally, on October 18, the stock broke out of the range and extended its rally on October 20.

It has a pattern target of $37, which is close to the lifetime highs. There is no significant resistance in between, therefore, we recommend a buy on PPC at the current levels of $31.04. The stop loss can be kept at $27, a level not seen for more than two months. The trade offers us a risk to reward ratio of about 1:1.5.

BERY – Buy 59.88, SL 56, Target 67

Weekly chart

BERY has been in a strong uptrend since 2016. It has a clear pattern. It rallies and then corrects towards the 20-week exponential moving average (EMA) and occasionally to the trendline drawn. On completion of the correction, it again resumes its uptrend.

Recently, the stock had again corrected to the trendline, from where it found support and broke out to new lifetime highs last week. We expect this trend to continue until the stock breaks and closes below the trendline support. We want to enter this stock as it has re-established its uptrend.

Daily chart

The stock broke out of the overhead resistance of $58.95 on October 06. Afterwards, it successfully retested the breakout levels and has resumed its uptrend. We can buy the stock at the current levels of $59.88 and keep a stop loss of $56. We shall close the position if the stock falls below the trendline. Our target objective is $67. The trade offers us a risk to reward ratio of about 1:2.

IIVI – Buy 43.3, SL 39, Target 52

Weekly chart

The stock bottomed out in October-2014 around the $10.78 mark. Thereafter, it started a new uptrend that continued till February of this year, after which, the stock entered a period of correction. $41.1 has acted as a stiff resistance on the way up. However, last week, the stock broke out to new highs and we expect it to continue higher.

Daily chart

On the daily chart, we find that the stock has formed a bullish inverse head and shoulders pattern. The pattern completed with a breakout of the neckline on September 27. Thereafter, the stock successfully completed a retest of the neckline. The stock has a pattern target of $52. We want to enter the stock at the current levels and keep a stop loss of $39, which is just below the low created on October 19. This gives us a risk to reward ratio of greater than 1:2.

 

 

Important: Never invest money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



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