2-for1 Sale
Many stocks had a bad year on the TSX last year, but there are a few that have started to recover and that could be back on their way up. There are many reasons that stocks can falter: scandals, poor financial results, struggling commodity prices, and sometimes just market or industry conditions can pull a stock’s value down.
In some cases, those reasons are not long term in nature, and that’s why value investors like Warren Buffett look for companies that have been hit by scandal — to take the opportunity to buy a good business at a low price.
Below, I have listed three stocks that had a dreadful 2017, but that have started to rebound.
Home Capital Group Inc. (TSX:HCG) comes to mind when thinking of Buffett; after all, he did give the company a lifeline after he saw its stock plummet amid a scandal that involved misleading investors. That can be a particularly hard image to shake, because it involves winning back the trust of investors, which isn’t impossible if the company can produce results, but that can take some time.
Harder stress tests for mortgages is just one reason the lending company might still find challenges in 2018, even if it can recover from its troubled image.
In 2017, Home Capital’s stock lost more than 44% of its value, and that could have been even more if not for the confidence that Buffett showed in the company. However, in the past three months, the share price has risen more than 15%, and it could be starting its ascent back up.
A lot will depend on how strong the company’s Q4 results will be in February and how close Home Capital can get to its prior year results. In Q2, Home Capital took a big hit as a result of the scandal and posted a net loss of $111 million, which wiped out the $108 million in profit that the company had recorded in the two prior periods combined.
The following quarter saw a return to profitability, but the company’s sales were still down more than 34% from a year ago.
Aimia Inc. (TSX:AIM) wasn’t involved in any scandals last year, but when it was announced that the company was losing its contract with Air Canada and that the airline would launch its own loyalty program, the stock went over a cliff.
After steadily trading at ~$9, Aimia stock eventually collapsed to under $2 a share. The Aeroplan deal with Air Canada deal remains in effect until 2020, and Aimia noted that it still has contracts with Toronto-Dominion Bank and Canadian Imperial Bank of Commerce which go until 2024.
The share price has risen more than 135% in the past six months, as the stock looks to continue its recovery in 2018. The large sell-off looks to have been a significant overreaction when you consider that Aimia still has time to replace the loss of Air Canada’s business, but the problem with the markets is that panicked investors may not necessarily be the most rational ones.
When the market overreacts, it creates an opportunity for investors that are not afraid of taking on some risk.
