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Are There Hidden Bargains At Supergroup PLC And Royal Bank of Scotland Group plc?

Shares in Supergroup (LSE: SGP) rose by as much as 11% on Wednesday morning, reversing Tuesday’s sharp sell-off.

The retailer of Superdry clothes reported underlying earnings per share of 20p for the first half of the year, up from 11.9p per share for the same period last year. Like-for-like retail sales were up by 17.2% during the six months to 31 October, while wholesale revenue was up by 7.8%.

The group also declared an interim dividend of 6.2p per share. This will be Supergroup’s first ever dividend and reflects its strong balance sheet and rising net cash balance.

Indeed, the only obvious problem area was the company’s US business. Following Supergroup’s decision to buy back the licence from its former franchisee, the firm has been footing the bill for turning around its US operations.

In today’s results, Supergroup said that it is taking more time than expected to “fully reset the customer proposition”. The North American business generated an operating loss of £2.4m and an exceptional loss due to stock write downs of £2.3m during the first half.

Is Supergroup a buy?

Supergroup has been a rollercoaster ride for long-term investors. Since the group’s flotation in 2010, Supergroup’s shares have hit highs of more than 1,700p and fallen as low as 267p.

Supergroup shares are trading at the upper end of this range at the moment, and the stock doesn’t look cheap to me. A strong set of second-half results will be required to meet full-year forecasts for earnings of 67.5p per share, which equates to a forecast P/E of 24.

Although I expect the group’s performance to stabilise under the management of former Kingfisher boss Euan Sutherland, I am not sure that now is the best time to buy.

Royal Bank of Scotland

News that the government is planning to start selling its shares in Royal Bank of Scotland Group (LSE: RBS) has not helped the bank’s share price. The shares are currently trading at a 29-month low of 290p.

This could be good news for value investors, as it represents a 25% discount to the bank’s tangible net asset value of 384p per share. This discount may be justified, of course. RBS is still in the process of selling various bad assets and must also sell or float its Williams & Glyn business by the end of 2017. These transactions will affect the bank’s net asset value.

However, I’d argue that investors know much more about RBS’s problems than we did two years ago, when the shares were trading at a similar level.

The bank is also confidently expected to report a second consecutive year of profit in 2015. Analysts are forecasting earnings per share of 26.9, giving a 2015 forecast P/E of 10.7. However, forecasts for next year are more downbeat, with earnings of just 22.4p per share expected.

My view is that RBS isn’t going to be a quick flip, but it could be a profitable investment over a 3-5 year time-frame. The shares’ discount to net asset value is likely to be reduced at some point. The eventual resumption of dividends will attract new institutional money into the stock, and could trigger a re-rating such as we saw with Lloyds Banking Group.

Patience will be required, but I’d rate RBS as a decent recovery buy.

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Roland Head 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.