Don’t buy Tullow Oil plc, Randgold Resources Ltd and Indivior plc until you read this!

Bilaal Mohamed puts Tullow Oil plc (LON: TLW), Randgold Resources Ltd (LON: RRS) and Indivior plc (LON: INDV) under the microscope.

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Today I’ll be taking a closer look at oil & gas explorer Tullow Oil (LSE: TLW), gold mining business Randgold Resources (LSE: RRS), and pharmaceutical company Indivior (LSE: INDV). Should you be buying any of these companies today?

Growth priced-in

Africa-focused gold miner Randgold Resources reported an increase in profits for the first quarter of the year after its flagship operation put in a good performance to offset the impact of technical issues at some of its other mines. The company reported pre-tax profits of $85m compared to $61m for the same period a year earlier, on higher revenues of $267.6m, compared to $231.3m for Q1 2015.

Randgold’s shares have enjoyed a strong rally this year, gaining 56% in just six months and are starting to look expensive. Market consensus suggests a strong year for the FTSE 100-listed miner with analysts expecting a 33% rise in earnings, followed by further 14% improvement in 2017. The shares trade on 33 times forecast earnings for this year, falling to 29 times for the year to December 2017. Randgold’s shares look fully valued to me, with strong medium-term growth already priced-in.

Heading in the wrong direction

Specialist pharmaceuticals supplier Indivior revealed a drop in profits when it announced its results for the three months to 31 March recently. The FTSE 250-listed drugmaker said profits dropped to $86m in Q1, from $102m a year earlier, despite revenues rising 3% to $258m.

Indivior, which specialises in medication for opioid dependence and was demerged from consumer goods giant Reckitt Benckiser at the end of 2014, has struggled since the demerger and reported a huge 41% decline in earnings last year.

Consensus forecasts suggest a gloomy outlook, with the City predicting a 28% drop in earnings this year, followed by a further 15% decline next year. This leaves the firm trading on a cheap-looking price-to-earnings ratio of nine for this year, rising to 11 for the year ending December 2017. However, with shrinking revenues and profits, the company is heading in the wrong direction and for me the shares look like a value trap.

Huge debt pile

Long-term investors in oil & gas explorer Tullow Oil will have seen the value of their shares plunge in recent years from £15 in 2012 to around £2.50 today. The FTSE 250  firm suffered a huge pre-tax loss of $1.3bn in 2015, which was an improvement on the $2bn loss reported the previous year. Increased production and cuts in capital expenditure should help the company to return to profit this year, but Tullow’s large debt pile means the shares will suffer if the oil price remains low.

The verdict

Randgold shares have enjoyed a strong rally in recent months, and the shares are looking expensive with premium P/E ratings for this year and next. Nervous investors might want to cash-in on the recent rally and take profits. New investors should, however, wait for a strong market correction before dipping into the shares.

The medium-term outlook for Indivior is poor, and although bargain hunters may find the low valuation attractive, I would stay away and avoid a potential value trap, at least until growth appears on the horizon. Tullow remains a very risky oil play highly geared to the oil price. The shares should rally if the oil price recovers soon, but investors should expect further pain if it doesn’t.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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