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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 (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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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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Trade Recommendation: Bela

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Bela’s bullish run came to a screeching halt less than a week after the Bela/Bitcoin pair generated an all-time high of 0.00018 on April 8. The market registered a lower high of 0.00016405 on April 14. Since then, Bela tumbled as it struggled to defend key levels such as 0.00007 and 0.00004.

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The market finally established support at 0.000009 on December 7. From Bela’s all-time high, the market lost 95% of its value in about eight months. While that’s an astronomical loss in value, it gives new investors an opportunity to buy the bottom, which limits risks and offers significant rewards.

Technical analysis reveal that 0.000009 is the bottom, as the market was able to generate a true bounce at this level. The pair went from 0.000009 to 0.00003975 in about a month – a 341.67% increase in value. With such a rapid climb, it’s only healthy for the market to retreat. This is a good opportunity for you to enter, and buy cheap.

The strategy is to buy as close to 0.000025 support as possible. The pullback is only temporary. Once the selling is over, the market will attempt to breach resistance at 0.00004. Take out that level and we have a target of 0.00007.   

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Daily Chart of Bela/Bitcoin on Poloniex

As of this writing, the Bela/Bitcoin pair is trading at 0.00002716 on Poloniex.

 

 

Disclaimer: The writer owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Trade Recommendation: Stellar

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The price is at 0.50 support level. The reversal candlestick pattern gives a signal that the price can bounce from this support. RSI drops to the oversold zone and it can support the possible price reversal. The double bottom chart pattern also tells us about a trend reversal. MACD and DMI confirm further downward movement. Presently, we have weak signals for opening long positions. If you can take high risk, the current price is very good for buying. Entry level is 0.52 with stop orders at 0.40 level. Profit targets are 0.70 and 0.90 resistance levels. If you would like to get more solid signals confirming the price reversal and further upward movement, it’s better to wait for a breakout above the downtrend line and as additional signal, a breakout above the high of the double bottom pattern. Don’t forget that the markets are not stable now and they can drop lower. Stellar can reach the next support at 0.30 level. That’s why using stop-loss orders and proper risk management is strong recommended.

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Market: STRUSDT
Buy: 0.52
Stop: 0.40
Profit Targets: 0.70 and 0.90

The trading signal is based on Poloniex chart.
Disclaimer: The analyst does not have investments in Stellar.

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Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Trade Recommendation: Ethereum Classic

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The daily chart gives us a bullish signal. If we look at the 4H chart, we can see a fail attempt to break SMA100 and the strong resistance level. The market formed a new swing high which can be used for placing pending orders for buy. If the price can move above this level, we’ll get a trend reversal signal and a new buy opportunity. Long trades will be opened in the same direction as the main movement on the higher time frame. Entry level is 0.035300 with stop orders at 0.029500 level. Profit targets are 0.042000 for short term and 0.050000 for long term trades. If you don’t use leverage, trading volume for this trade is up to 10% from your deposit.

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Market: ETCETH
Buy: 0.035300
Stop: 0.029500
Profit Targets: 0.042000 and 0.050000

The trading signal is based on Poloniex chart.
Disclaimer: The analyst does not have investments in Ethereum Classic.

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Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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