If investors are interested in high-reward stocks, then they should raise their risk bar and screen for falling knives.
Since falling knives are stocks that have declined more than 59% in the last 12 months of trading, they bear a high potential to outperform either their industry or the overall market if backed by the right tailwind. They involve a considerable level of risk at the same time, however, since they are near oversold levels, but doesn’t mean they will continue to fall.
Their sharp decline on the stock market may indicate financial distress, but if investors look for companies that have a moderate to low debt-to-equity ratio and a moderate to high current ratio, the risk can be reduced significantly.
To increase the odds of finding a growing company, investors should screen for U.S. tech stocks as the industry is crawling with companies operating in several rapidly-evolving fields. One of these fields is artificial intelligence, where, as the McKinsey & Company’s 2017 survey found, the U.S. was already topping the worldwide ranking in terms of its diffusion and investments.
From my screening, I generated Veritone Inc. (VERI, Financial), a Costa Mesa, California-based developer of artificial intelligence software.Ă‚
Shares of Veritone closed at $5.3 on Thursday following a 62% decline over the past year through March 28. The closing price was below the 200-day simple moving average line and near the 100 and 50-day lines. The 52-week price range is $3.65 to $24.76. The stock has a market capitalization of roughly $103.84 million.
As a debt-free company, Veritone's total debt-to-equity ratio is zero versus the industry median of 55.38, and has a current ratio of 1.54 compared to the industry median of 1.93. These two ratios temper the possibility of near-term bankruptcy, which is implied by an Altman Z-score of -2.11 that indicates the company is in the distress zone.
GuruFocus assigned a financial strength rating of 6 out of 10, meaning the company's balance sheet is moderately solid.
The stock has a price-book ratio of 1.68 versus an industry median of 2.93 and a price-sales ratio of 3.51 versus an industry median of 2.86.
The company closed 2018 with a loss of $61.1 million on revenue of $27.05 million, which grew 88% from 2017.
For the first quarter of 2019, Veritone forecasts total net revenues of $11.5 million to $11.9 million, reflecting a 161.4% to 170.5% boost from the same quarter of 2018. Achieving this target, which represents the main short-term catalyst to the share price, will be possible thanks to the addition of five new applications to the company’s aiWARE platform in 2018, which have enhanced the interest of clients significantly. The aiWARE platform provides customers with solutions based on cognition of audio, video and structured content. The software helps organizations manage the tremendous bulk of data they collect.
Wall Street issued a buy recommendation rating for Veritone with an average target price of $14.88, reflecting a nearly 180% upside from the closing price on Thursday.
The 14-day relative strength index of 38.77 suggests the stock is close to oversold levels.
Disclosure: I have no positions in any securities mentioned.
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