Tuesday, March 29, 2016

Stocks to Watch 2016 Valeant Pharmaceuticals nyse:VRX Sobeys tse:EMP.A undervalued

Valeant Pharmaceuticals nyse VRX

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Although the specifics regarding Valeant's problems won't be aired out until the company releases it's 10-k annual report in April of 2016, it's safe to say the stock has borne the full brunt of investor scrutiny (high institutional ownership has been a factor).  The biggest risks here on out are revenue growth, write-offs, and lawsuits - but even in a worst case scenario there is no way these three will severely impair earnings for two or more quarters.  Valeant continues to own a number of game changing drugs and products - a non-ownership relationship with Philidor doesn't change that !

revenue stream remains strong this will be key in keeping operating costs per unit within reasonable levels.

- xifaxan is approved
- diversity of portfolio
- global exposure - problems in the USA do not affect Valeant's ability to affect/control prices in other countries.
- sales in China since 2013
- ranks high among diversified companies

Sobeys tsx:EMP.A

The large quarterly write-off related to the Safeway assets should be seen as a one time occurrence; the affect on future earnings is being exaggerated.  This makes it a stock to watch in the second half of the year.

A recovery in the price of oil (will average $45 this year and $72 in 2017) will be a boost to Alberta's economy - big Canadian companies have been able to withstand volatility more than shale companies south of the border/rig count down in USA = less oil glut in North America = more opportunity for Canadian oil price to close gap with WTI.  Since acquiring Safeway, Sobeys has been the number one grocery chain in Alberta.  For the first three months of 2016 calendar year same store sales +0.4% chain-wide despite being up +2.7% in its base of eastern Canada.  2016 has thus far been an extremely volatile time for Alberta's economy (keystone pipeline rejection/oil price dropped to historic low/oil companies slashed capital spending); it is likely that the situation will improve later on this year and into next year.

  • price/earnings ratio greatly undervalued versus alternative stocks Loblaw Companies, Metro Inc.
  • book value per share is at a discount.

Royal Bank of Scotland Group plc

Since coming off one of its worst earnings quarters in the bank's history the stock is off 30%.  The write-offs which hampered the stock last year will become less of a burden in the future thanks to

  • time deadline for claims related to mis-selling scandal (risky loans, payment protection insurance in US) now almost a decade old
  • 1.5 billion pounds of the latest write-down relate to a settlement with the US Federal Housing Agency for mis-selling of mortgage backed securities
so expect these write-downs to become smaller over the next 1-2 years which will allow the bank to return to profitability - and perhaps even start paying a dividend.

Risk is not a major factor - the bank is 73% backed by the British government.

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