Five Midcap Stocks That May Be Worth the Risk

All carry Buy recommendations, but their lack of liquidity may make it hard to sell the shares later.

Dror Reich
Dror Reich

Too small to be included in the TA-100 index, the middle cap stocks on the Tel Aviv Stock Exchange generally don't attract much analyst coverage and are usually prone to sluggish trading. Low trading volumes can pose a dilemma for investors: Infrequent trading means higher volatility and greater upside potential, along with often being underpriced to begin with due to being overlooked. However, they could be difficult to unload when the time comes.

There are 445 midcap stocks traded in Tel Aviv totaling NIS 64 billion in market value. Here are several that analysts have given Buy recommendations.

Note: The recommendations shown here cannot substitute for investment advice that takes into account a client's needs and instructions.

If no gas, at least there's cash

Recommended by Clal Finance.

Israel Opportunity Energy Resources is a limited partnership holding 10% shares in the six offshore Pelagic oil and gas exploration licenses, together with Benny Steinmetz (42.5% ), Teddy Sagi (42.5% ) and the Norwegian operator AGR (5% ).

Risks: Exploratory drilling in the northernmost Ishai section will not begin before September and the presence of natural gas won't be known before results come in. If oil or gas is discovered there, Israel and Cyprus will need to thrash out an agreement on how to split it.

Prospects: Gas was found early this year in the Aphrodite field, located in Cyprus waters adjacent to the Ishai license. Preliminary surveys indicate a strong likelihood for finding a large quantity of gas, but aren't clear as to whether it would actually be located within the Aphrodite field.

Israel Opportunity's $39 million of cash holdings exceeds its market value, which is not bad for tight times like these. After covering its share of the cost for the upcoming drilling, the partnership will have $29 million remaining in the kitty.

Bottom Line: Analyst Yaron Zar of Clal Finance gives Israel Opportunity shares a 38 agorot target, over double its current trading price.

Betting on a deep discounter

Recommended by Poalim Sahar.

Founded in 1993, Victory Supermarket Chain operates 20 stores. Its shares were floated in May 2011 and the chain, branding itself a "deep discounter," is expanding cautiously, opening two to four new stores a year.

Risks: Food retailing in Israel suffered a heavy blow in the past year from price protests. Vying for market share, chains are opening new stores, crowding the market and sparking price wars. At the height of the global economic crisis, the local retail market was characterized as defensive, largely thanks to rigid demand. But the market has now become extremely competitive, with price wars cutting deep into profits.

Prospects: In today's ultra-competitive market, discounters like Victory could eat into the market shares of the larger chains and strengthen their position. Victory opened three new stores in 2011 and took over two other existing supermarket locations. Expansion will boost turnover by about 16% in the next two years.

Victory declared a NIS 5 million buyback program for its own shares last month. Management explained that the 22% drop in its share price since the public offering is at variance with the company's financial results. The move also reflects a vote of confidence by management in the company's operations.

Bottom Line:Yoav Burgan, head of sell-side research at Poalim Sahar, gives Victory a target price of NIS 24 per share, 40% above its current trading level.

Drug development on the cheap

Recommended by U.S.-based investment house Roth Capital Partners:

BioLine Rx is directly and indirectly involved in developing drugs for a wide range of illnesses, from the earliest stages of development to advanced clinical trials. In July 2011 its shares also began trading on Nasdaq

Risks: Biomed is a high-risk industry, with investors aspiring to come up with an innovative drug or revolutionary treatment that will send value skyrocketing. But biomed companies like BioLine now face difficulties obtaining badly-needed financing as venture capital funds are shying away from this sector along with the public, both of them scared off by the risks and negative market mood.

Prospects: BioLine doesn't take part in the expensive trial stages of development, but rather acquires its assets from academia and research institutes, develops them, and then sells the licensing rights to major drug developers. Its research and development costs are therefore relatively low. The focus is on creating value until reaching the

The Tel Aviv Stock Exchange. Credit: Ofer Vaknin



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