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3 Risky Picks That Could Pay Off

These companies have weak financials, but decent profitability

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Alberto Abaterusso
Jul 29, 2021

Summary

  • Kellogg Co. and Conagra Brands Inc are in some financial distress, while SJW Group is in considerable financial distress
  • However, their ability to generate profits could make up for it
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The three stocks listed below have underperformed the broader market recently. They are also in financial distress, as represented by low Altman Z-Scores, meaning that they face the potential of bankruptcy within the next two years.

Nonetheless, their ability to generate profits seems to be good, 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 continue growing and strengthen their balance sheets, though investors should be on guard in case things start to get worse.

Kellogg Co.

The first stock to consider is Kellogg Co. (

K, Financial), a Battle Creek, Michigan-based global manufacturer and marketer of ready-to-eat cereal and convenience foods.

An Altman Z-Score of 2.56 combined with a debt-to-equity ratio of 2.65 (versus the industry median of 0.42), indicates that the company is in some kind of financial distress, though it is only in the grey zone in terms of bankruptcy potential. The interest coverage ratio of 6.43 shows that the company doesn’t have any problems paying the interest expenses on its debt for the time being.

GuruFocus has assigned a rating of 7 out of 10 to the company's profitability, driven by a return-on-equity (ROE) ratio of 42.86% versus the industry median of 6.9%, and by a return-on-capital (ROC) ratio of 45.72% versus the industry median of 11%.

Sell side analysts have established an average target price of $67.95 per share, which represents a nearly 8% upside from Wednesday’s closing price. Analysts have recommended two strong buys, one buy, 15 holds, two underperform ratings and one sell rating for the stock.

The stock has declined by 10.82% over the past year, underperforming the S&P 500 by more than 25%, for a market capitalization of $21.43 billion, a 52-week range of $56.61 to $72.88 and a forward dividend yield of 3.66%. The company last paid a quarterly dividend of 58 cents per common share on June 15.

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Conagra Brands Inc

The second stock to consider is Conagra Brands Inc (

CAG, Financial), a Chicago, Illinois-based supplier of shelf stable packaged and temperature-controlled food products to retailers, restaurants and food service businesses.

The stock has an Altman Z-Score of 1.86, indicating a chance of bankruptcy within the next two years. The debt-to-equity ratio is 1.08 compared to the industry median of 0.42. However, the company should be able to keep on paying its interest expenses for the time being, as indicated by an interest coverage ratio of 4.21.

GuruFocus has assigned a rating of 7 out of 10 for the company's profitability, driven by an operating margin of 15.88% versus the industry median of 5.46% and a net margin of 11.61% versus the industry median of 3.7%. Also, the return on capital (ROC) ratio of 69.73% outperforms the industry median of 11%.

The share price was $33.76 at close on July 28. Analysts are expecting the price to grow 15% to a target price of $39.19 per share. They have also recommended four strong buys, six buys, two holds, one underperform rating and one sell rating.

The stock has fallen by 9.7% over the past year, underperforming the S&P 500 by nearly 30%, for a market capitalization of $16.22 billion, a 52-week range of $32.55 to $39.34, and a forward dividend yield of 3.71%. The last financial indicator is based on a quarterly dividend per share of 31.3 cents that will be paid on Sept. 2.

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SJW Group

The third stock to consider is SJW Group (

SJW, Financial), a San Jose, California-based provider of regulated water and wastewater services to more than 2 million people residing across California, Connecticut, Maine, Texas and Tennessee.

The stock has an Altman Z-Score of 0.91, indicating a concrete possibility for bankruptcy within two years. The interest coverage ratio of 2.12 tells that the company should be able to continue paying its interest expenses for the time being, but not for long if its profits drop at all. The debt-equity ratio is 1.53 compared to the industry median of 0.86.

GuruFocus has assigned a rating of 7 out of 10 to the company's profitability The score is driven by an operating income margin of 20.46%, which outperforms the industry median of 14.47%.

Wall Street sell side analysts predict that the share price ($67.80 as of July 28) will climb to an average target price of $70.20 per share, which reflects a 3.54% upside from Wednesday's closing price. One analyst on Wall Street has recommended a strong buy rating for this stock.

The stock has risen by 6.72% over the past year, underperforming the S&P 500 by more than 30%. The market capitalization is $2.02 billion, the 52-week range is $58.01 to $71.69 and the forward dividend yield is 2%. The company last paid a quarterly dividend of 34 cents per common share on June 1.

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Disclosure: I have no positions in any security mentioned in this article.

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Disclosures

I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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