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A Duo of Risky Picks That Could Pay Off

Despite weak balance sheets, these companies enjoy good profitability

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Nov 10, 2021
Summary
  • McCormick & Co Inc and JM Smucker Co seem to be in financial distress
  • However, their ability to generate profits could make up for it
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The following two 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 6 out of 10. These stocks also hold positive recommendation ratings on Wall Street, which means that sell-side analysts believe that these companies have the potential to continue growing their stock prices, though investors should be on guard in case things start to get worse.

McCormick & Co Inc

The first stock to consider is McCormick & Co Inc (

MKC, Financial), a Hunt Valley, Maryland-based manufacturer and distributor of flavor products to the food industry.

An Altman Z-Score of 2.48 combined with a debt-to-equity ratio of 1.26 (versus the industry median of 0.4) suggests that the company is in some kind of financial distress, though the risk of bankruptcy is still fairly low. The interest coverage ratio of 7.93 indicates that the company is still able to pay the interest expenses on its outstanding debt for the time being.

GuruFocus has assigned a rating of 8 out of 10 to the company's profitability, driven by a return on capital (ROC) ratio of 87.33% versus the industry median of 11.56%.

Sell-side analysts have established an average target price of $88.29 per share for the stock, which represents a 9% upside from Tuesday’s closing price. Analysts have recommended one strong buy, two buys, 10 hold ratings and only one underperform rating for the stock.

The stock has declined by 13.84% so far this year, underperforming the S&P 500, for a market capitalization of $21.64 billion, a 52-week range of $77.85 to $98.80 and a forward dividend yield of 1.68%. The company paid a quarterly dividend of 34 cents per common share on Oct. 26.

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JM Smucker Co

The second stock to consider is JM Smucker Co (

SJM, Financial), an Orrville, Ohio-based global manufacturer of branded food and beverage products.

An Altman Z-Score of 1.97 combined with a cash-to-debt ratio of 0.04 (versus the industry median of 0.56) and a debt-to-equity ratio of 0.59 (versus the industry median of 0.4) indicates that the company is in financial distress and could go bankrupt within two years. The interest coverage ratio of 7.53 means that the company should be able to keep paying the interest expenses on its outstanding debt for the time being.

GuruFocus has assigned a rating of 7 out of 10 for the company's profitability, driven by an operating margin of 16.62% (versus the industry median of 5.38%) and a return on capital (ROC) ratio of 55.18% (versus the industry median of 11.56%).

The share price was $128.58 at close on Nov. 9 compared to analysts’ average target price of $125.36, reflecting a 9.22% potential upside. Analysts have recommended two strong buys, three buys, 10 holds, two underperform ratings and only one sell rating for the stock.

The stock has gained 11.20% so far this year, underperforming the S&P 500. The stock has a market capitalization of $13.93 billion, a 52-week range of $110.53 to $140.65 and a forward dividend yield of 3.08%. A quarterly dividend per share of 99 cents will be paid on Dec. 1.

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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.
The views of this author are solely their own opinion and are not endorsed or guaranteed by GuruFocus.com
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