The following three stocks have underperformed the broader market recently. They are also in considerable financial distress, as represented by poor Altman Z-Scores, which indicates a possibility for bankruptcy within the next two years.
Nonetheless, their ability to generate profit seems to be decent, as signaled by GuruFocus profitability ratings of at least 6 out of 10. They also hold positive recommendation ratings on Wall Street, meaning that sell side analysts believe these companies have the potential to improve their balance sheets, though investors should be on guard in case things start to get worse.
Edison International
The first stock to consider is Edison International (EIX, Financial), a Rosemead, California-based regulated supplier of electricity in Southern, Central and Coastal California.
The stock has an Altman Z-Score of 0.6, which indicates financial distress. Furthermore, the interest coverage ratio of 1.34 tells that the company could have trouble paying its interest expenses, weighing on a balance sheet that already appears to be highly leveraged compared to its peers. In fact, the debt-equity ratio is 1.61, ranking worse than 77.62% of 487 companies that operate in the utilities-regulated industry.
GuruFocus has assigned a rating of 6 out of 10 to the company's profitability, driven by a net margin of 6.9%, standing a bit below the industry median of 8.28%, and a 3-Year EPS without NRI growth rate of 4.8%, being almost on par with the industry median of 4.85%.
Wall Street sell side analysts have set an average target price of $71.38 per share, meaning that they are expecting a robust rebound in the market value of the stock, up to 28.43% from Friday’s closing price to hit within the year.
Analysts have issued 4 strong buy recommendation ratings, 4 buy recommendation ratings and 7 hold recommendation ratings.
The stock has declined by 8.10% so far this year, underperforming the S&P 500 by about 19%, for a market capitalization of $21.09 billion, a 52-week range of $48.47 to $66.68 and a forward dividend yield of 4.77%. The company last paid a quarterly dividend of 66.3 cents per common share on April 30.
RGC Resources Inc
The second stock to consider is RGC Resources Inc (RGCO, Financial), a Roanoke, Virginia-based regional provider of regulated natural gas for residential, commercial and industrial needs.
The stock has an Altman Z-Score of 1.19, indicating financial distress. The interest coverage ratio of 3.28 tells that the company should be able to keep on paying its interest expenses for the time being. Investors cannot, however, neglect a debt-equity ratio of 1.31, which signals that the balance sheet is currently highly leveraged, ranking worse than 67.97% of 487 companies operating in the utilities–regulated industry.
GuruFocus has assigned a rating of 6 out of 10 for the company's profitability, driven by a net margin of 15.11%, beating the industry median of 8.28%, and a three-year EPS without NRI growth rate of 14.8%, beating the industry median of 4.85%.
The share price, $22.53 at close on June 18, is expected to bounce back strongly within a year, up by nearly 51%, as one sell-side analyst on Wall Street has established a target price of $34 per share and a recommendation rating of buy for the stock.
The stock has fallen by 6.55% so far this year, underperforming the S&P 500 by 17.55%, for a market capitalization of $185.39, a 52-week range of $21.32 to $27.4 and a forward dividend yield of 3.3% (based on a quarterly dividend per share of 18.5 cents that will be issued on Aug. 1).
CMS Energy Corp
The third stock to consider is CMS Energy Corp (CMS, Financial), a Jackson, Michigan-based energy operator that engages in the generation of electricity, natural gas and renewable sources, serving nearly 2 million electric and about 1.8 million residential, commercial and industrial customers.
The stock has an Altman Z-Score of 0.84, indicating financial distress. The interest coverage ratio of 2.64 tells that the company should be able to continue paying its interest expenses for the time being, even though its balance sheet is highly leveraged, as the debt-equity ratio is 2.64.
The operating activities appear to still be profitable, as GuruFocus has assigned a rating of 7 out of 10 to the company's profitability. The score is driven by a return on equity (ROE) ratio of 15.98%, which outperforms the industry median of 8.46%.
Wall Street sell side analysts predict that the share price ($58.12 as of June 18) will rebound significantly within a year, climbing to an average target price of $66.19 per share, reflecting a 14% upside from Friday's closing price. Analysts have recommended two strong buys, four buys and eight hold ratings for this stock.
The stock has fallen by 2.53% over the past year, underperforming the S&P 500 by 13.53%, for a market capitalization of $16.82 billion, a 52-week range of $53.185 to $67.98 and a forward dividend yield of 2.99%. The company last paid a quarterly dividend of 43.5 cents per common share on May 28.
Disclosure: I have no positions in any security mentioned in this article.
