The following stocks have underperformed the broader market recently. They are also in financial distress, as represented by low Altman Z-Scores, meaning that they could go bankrupt within the next two years.
Nonetheless, their ability to generate profits seems to be good, as signaled by GuruFocus profitability ratings of at least 5 out of 10. These stocks also hold positive recommendation ratings on Wall Street, which means sell-side analysts believe these companies have the potential to continue growing their stock prices, though investors should be on guard in case things start to get worse.
York Water
The first stock to consider is The York Water Co. (YORW, Financial), a water utility company operating in the regulated market and engaging in the purification of water from regional reservoirs for subsequent processing for industrial uses in southern Pennsylvania via a 15-mile pipeline from the Susquehanna River to Lake Redman.
An Altman Z-Score of 1.72 combined with a debt-to-equity ratio of 0.88 (versus the industry median of 0.87) suggests the company is in some kind of financial distress, though the risk of bankruptcy is fairly low. The interest coverage ratio of 5.85 indicates the company is still able to pay the interest expenses on its total outstanding debt for the time being.
GuruFocus has assigned a rating of 8 out of 10 to the company's profitability, driven by an operating margin of 40.15% versus the industry medina of 13.92% and a net margin ratio of 30.47% versus the industry median of 8.35%.
Sell-side analysts have established an average target price of $55 per share, which represents a 25.4% upside from Friday’s closing price of $43.86 per share. On Wall Street, the stock has a median recommendation rating of overweight.
York Water will pay quarterly dividends with the next payout of 19.5 cents per common share on April 14. The stock has a forward dividend yield of 1.78% as of Feb. 25.
The stock has risen 5.15% so far this year, underperforming the S&P 500 by approximately 10%, for a market capitalization of $574.77 million and a 52-week range of $40.7 to $53.77.
The resumption of activities that are increasingly emerging from the Covid-19 pandemic will determine a growing industrial water demand and create positive momentum for the company.
Canadian Pacific Railway
The second stock to consider is Canadian Pacific Railway Ltd. (CP, Financial), an owner and operator of transcontinental rail freight services in the Canadian provinces of Quebec and British Columbia and the Northeast and Midwest regions of the United States.
An Altman Z-Score of 1.96 combined with a debt-to-equity ratio of 0.6 (versus the industry median of 0.64) indicates the company is struggling financially despite not being in troubled areas. Therefore, the probability of bankruptcy within two years is there, but very low. The interest coverage ratio of 7.28 means the company can pay interest expenses on its total outstanding debt for the time being.
GuruFocus has assigned a rating of 9 out of 10 for the company's profitability, driven by an operating margin of 40.59% versus the industry medina of 5.9% and a net margin ratio of 35.67% versus the industry median of 3.88%.
The share price was $70.84 at close on Feb. 25, which is lower than analysts’ average target price of $111.94, reflecting 58% potential upside. On Wall Street, the stock has a median recommendation rating of overweight.
Canadian Pacific Railway will pay quarterly dividends with the next payout of 19 Canadian cents (15 cents) per common share on April 25. The stock has a forward dividend yield of 0.85% as of Feb. 25.
The stock has dropped 4% so far this year, underperforming the S&P 500 by approximately 20%. The stock has a market capitalization of $65.32 billion and a 52-week range of $64.37 to $83.07.
To meet the sharp increase in demand for goods and services due to the rapid recovery from the Covid-19 crisis, companies have been destocking since around the beginning of 2021. These companies are now increasing their investments to renew their inventories, which implies greater demand for the transport of inputs and raw materials for production and redistribution. Together with other operators, Canadian Pacific Railway should benefit from the tailwind.
