Although their share prices have lost more than 59% over the past 12 months, Wall Street sell-side analysts recommend buying shares of Canadian Natural Resources Ltd (CNQ, Financial) and Ecopetrol SA (EC, Financial), which are therefore called “falling knives.”
Some investors seek this category of stocks because they think that they can make substantial gains out of the investment following an expected share price rebound.
It is worth noting that this kind of investment implies a high risk for the investor, as a sharp decline in the share price could indicate that bankruptcy is near at hand.
The investor can, however, lower the risk of loss significantly by focusing on falling knives with a moderate to low financial burden. This article assesses this characteristic of the balance sheet with a moderate to low debt-equity ratio, which is an indicator of the financial leverage of the company.
Canadian Natural Resources
The share price of the Canadian oil and gas explorer and producer closed at $8.31 on March 23 for a market capitalization of $10.01 billion. The stock price declined 69.2% over the past 52 weeks through March 23.
Canadian Natural Resources Ltd has a moderate debt-equity ratio of 0.6. The Altman Z-Score of the company is 1.18 which, being less than 1.81, signals that it is in the distress zone. However, the company's Piotroski F-Score of 9 out of 9 indicates financial health.
In the last three months, eight Wall Street analysts recommended buying shares of this stock, three analysts recommended holding shares and only one analyst recommended to sell shares. As a result, the stock has a moderate buy recommendation rating. The average price target is $22.50 per share.
The stock has a price-book ratio of 0.41, a price-sales ratio of 0.6 and a 52-week range of $6.71 to $32.79. The 14-day relative strength index of 16 tells the share price trespassed oversold levels.
Ecopetrol SA
The share price of the Colombian integrated oil and gas operator closed at $7.16 on March 23 for a market cap of $14.72 billion. The stock price declined 67% over the past 52 weeks through March 23.
The company has a moderate debt-equity ratio of 0.68. Ecopetrol has an Altman Z-Score of 2.09 (in the 1.81 to 2.99 range), which indicates low bankruptcy risk. Furthermore, Ecopetrol has a Piotroski F-Score of 5, which indicates that the company is financially stable.
In the last three months, two Wall Street analysts recommended buying shares of this stock, while two others suggested a hold rating. The average price target is $13.58 per share.
The stock has a price-book ratio of 1.03, a price-sales ratio of 0.82 and a 52-week range of $6.28 to $23.24. The 14-day relative strength index of 20 indicates that the share price is in oversold territory.
Disclosure: I have no positions in any securities mentioned.
Read more here:
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