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A Duo of Falling Knives to Catch

Huya Inc. and Romeo Power Inc. have positive ratings despite falling more than 59% over the past year

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Nov 26, 2021
Summary
  • Sell-side analysts have issued positive recommendation ratings for Huya Inc. and Romeo Power Inc., even though they have been underperforming.
  • Investors seeking success amid falling knives should be aware that a strong decline in the share price could indicate permanent issues.
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Wall Street recommends purchasing shares of Huya Inc. (

HUYA, Financial) and Romeo Power Inc. (RMO, Financial). This sounds quite surprising, as these two equities have not performed well over the past 52 weeks through Nov. 24. With positive recommendations despite the share price tumble, these two stocks have earned the status of "falling knives."

Usually, investors are interested in falling knives because they aim to earn significant returns following an expected rebound in the share price. However, investors must be cautious with falling knives as these kinds of holdings carry a remarkable risk. The strong decline in the share price could be a sign of permanent issues - after all, investors have been selling them for a reason.

Huya Inc

Huya Inc. (

HUYA, Financial) is a Chinese operator of platforms where games are live-streamed for users.

Shares were trading around $8.10 at close on Wednesday following a decrease of 62.29% over the past 52 weeks.

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The stock has a market capitalization of approximately $1.92 billion, a 52-week range of $7.52 to $36.33 and a 14-day relative strength index of 39. The last indicator suggests that the stock is not close to oversold levels yet despite the sharp decline in the share price.

The balance sheet looks solid as GuruFocus has assigned a score of 7 out of 10 for the financial strength of the company. From the Altman Z-Score of 4.45 coupled with a value of 7 for the Piotroski F-Score, it seems that the company is in safe zones and its financial situation is stable.

Regarding profitability, based on the company's financials over the past five years through full 2020, it seems that total revenues continue to increase even though growth has been a bit slower recently. The net income switched to a profit in 2019 and doubled to $135.5 million in 2020. The net margin is improving as well and reached an 8.1% rate of total revenues in 2020, while the industry median was around 2.5%.

On Wall Street, the stock has a median recommendation rating of overweight with an average target price of approximately $10.80 per share.

Romeo Power Inc

Based in Vernon, California, Romeo Power Inc (

RMO, Financial) is a designer and manufacturer of lithium-ion battery modules and packs for the North American market of commercial electric vehicles.

Shares were trading around $4.26 at close on Wednesday following a decline of 83.86% that happened over the past 52 weeks.

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The market capitalization is about $571.43 million, the 52-week range is $3.94 to $32.73 and the 14-day relative strength index is 44, suggesting that the stock still trades far from the oversold levels despite the tumble.

Regarding its financial strength, GuruFocus assigned a score of 6 out of 10 to the company, which means that financial conditions are solid. As of Sept. 30, the company had $181.1 million in cash on hand and equivalents, exceeding the total debt of $6.6 million by a wide margin, while the current ratio was 7.8.

Based on the company's financials from 2018 to 2020, total revenues increased every year to reach $9 million in 2020, but both gross and operating income were consistently negative. Earnings from ongoing operations were positive in 2020, because during that period there has been a significant contribution from a non-operating line of income.

On Wall Street, the stock has a median recommendation rating of overweight with an average target price of $6.57 per share.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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