7 dogs that may end up your best friends

Founder and Publisher of the Switzer Report
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One of the enduring lessons stock market players must never forget is to be careful about what you sell. Just like a mad dog, those ‘dud’ and ‘dog’ stocks that have let you down for years can sometimes come back to bite you. And the time to be suspicious about selling those disappointing stocks should be when the big picture is changing.

The prevailing big picture for stocks has been rising interest rates have been bad for growth/tech companies, while value stocks have done well. However, with rate rises probably over and cuts likely to come along some time this year, growth stocks will gain friends and lower rates will bring takeover offers out of hiding.

  1. Let’s talk Virgin Money

Last week saw Virgin Money (VUK) surge 34.21% after it received a $5.7 billion cash takeover bid from British lender Nationwide. As I wrote in Saturday’s Report, this is a sign of things to come, as eventual falling rates will make some companies that were out-of-favour when rates were rising become more attractive.

  1. What about ZIP?

Recently there has been talk of US buy-now-pay-later business Affirm (or even Klarna that’s part-owned by CBA) possibly showing interest in its rival Zip Co. This has been good for Zip’s share price. The Australian pointed out a number of smaller competitors have collapsed and some of Zip’s larger competitors have exited the buy now, pay later market, including Apple, Goldman Sachs, and PayPal. The year-to-date chart below of Zip shows how dogs can become ‘must have’ stocks, when things change

ZIP

Right now, the analysts have the share price sliding by 10%. Two out of three analysts think the latest rises have been good enough, but UBS is tipping a 16.73% rise. Clearly, if a real offer emerges, UBS will look like the smartest tipsters in town. That’s why you have to be careful about selling stocks where the key share price diving circumstances are changing.

  1. Mesoblast is a tough call

An odd one is Mesoblast, which a lot of investors (including yours truly) have been disappointed in. I could have dumped this stock ages ago, but the company always dangles new opportunities. But these seem to get trumped by the US-based Food and Drug Administration (FDA), which is responsible for protecting the public health by assuring the safety, efficacy, and security of human and veterinary drugs, biological products, medical devices, our nation’s food supply, cosmetics, and products that emit radiation.

Interestingly, a class action is on the way, and if you’re a shareholder you might want to join the pile-in against Mesoblast, but you’ll have to contact Omni Bridgeway or William Roberts Lawyers by April 19 this year. I can’t see this helping the share price, but you might end up with some compensation, if the action is successful.

  1. Looking at lithium stocks

Back on the subject of companies that have disappointed but could be takeover targets or beneficiaries of changed circumstances, lithium stocks fall into this category and their share prices could turn on a dime if Beijing can conjure up renewed growth potential for its economy. At this stage, I can’t see any looming good China news but Beijing’s capacity to stimulate can be surprising. Any good news from our biggest trading partner would also be positive for BHP, Rio, and Fortescue.

  1. A2Milk update

While on China, let’s look at A2Milk (A2M), which recently surged after reporting better than expected. The chart below pretty well captures that positive 12.4% market reaction in a day and the share price rose 5.6% in about two trading weeks indicating that there is a market re-rating for the business.

A2M

A more buoyant Chinese economy, with more tourists coming down-under, will not be a bad development for A2M. And while many of the analysts are a little negative on the company after the big recent rises, Ord Minnett still sees a 23.33% upside.

  1. Tyro has potential

Another disappointer, Tyro (TYR) remains on the “has potential” good books for analysts, with the consensus rise at 37.2%. Six out of six expert company watchers remain believers.

And with the current share price at $1.12, you have to remember that Potentia Capital offered $1.60 last year, and the board of Tyro rejected it. I’d love to sell my Tyro shares but lower interest rates and what these might do to takeover action has kept me patient.

Since October 31, the share price has had a 30% gain from 86 cents, which has been a pay-off for the long-suffering believers in the business and the smarties who suspected that lower interest rates, the likelihood of takeover merchants looming and that $1.60 offer, all said 86 cents looked like a bargain.

  1. IDP Education worth learning about

One company I can’t let go of but haven’t dipped my toe into is IDP Education (IEL), which has 10.59% of its stock shorted and is the third most-shorted stock right now. Against that, the analysts like the company with a 29.8% thumbs-up, on average.

And this what each analyst is tipping for the company’s share price over the year ahead:

A mate of mine who knows this sector believes IEL’s position is assured and that the negative view defies his knowledge of the industry and what this company is bound to achieve. While I need to do more work on this, I’m tempted to listen to my colleague, who once owned a college that catered for overseas students. What I need to know is what the disbelievers are seeing.

Some dogs end up an investor’s best friend

Watch this space, as we will be on the hunt for ‘dogs’ that might soon have their day!

 

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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