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Alberto Abaterusso
Alberto Abaterusso
Articles (1665) 

3 Falling Knives for a Low-Yield Environment

These stocks have a low to moderate debt-equity ratio

February 18, 2019 | About:

The author of this study concluded that it is possible to beat the benchmark in terms of higher returns with falling knives stocks if the stocks, whose share prices have fallen more than 50% over the last 52 weeks, are properly selected for financial strength.

The study deduced that falling knives with low debt-equity ratios can produce risk-adjusted abnormal returns. Thus, a buy-and-hold strategy based on such criteria of selecting falling knives stocks can produce remarkable results of profitability and riskiness with no significant interference from volatility.

Therefore, I have been screening the New York Security Exchange, Nasdaq and other U.S. over-the-counter markets in search of falling knives stocks with a moderate to low debt-equity ratios.

In addition, I ran my screener for stocks that operate in the metal mining industry. Metal mining companies are going to benefit from a low real yield environment more than any other company, for two specific reasons. First, because such an environment promotes investments in commodities instead of in bonds and, therefore, the market price of the commodity will increase, boosting revenues of producers.

Second, when interest rates don’t rise, metal mining companies increase their budgets for the development of mineral assets, exploration activities and for merger and acquisitions.

Usually, when a miner reports a revenue boost, positive exploration results, successful completion of a development project or that it plans to merge with another company, the share price of the stock jumps.

Why do I think the real interest rate will go lower? Because the U.S. Federal Reserve will likely keep the federal funds rate target unchanged at 2.25-2.5% following disappointing manufacturing data from January.

Here is the result of my search.

Lithium Americas Corp. (NYSE:LAC) closed at $3.13 per share on Friday following a 58% decline for the past year through Feb. 15. The stock has a debt-equity ratio of 12% versus an industry median of 34%. GuruFocus has assigned a financial strength rating of 7 out of 10 and a profitability & growth rating of 3 out of 10.

Lithium Americas Corp. is a Vancouver, Canada-explorer for lithium deposits in the Americas. The company holds mineral interests in lithium projects located in Argentina and Nevada.

The share price at close Friday is below the 200-, 100- and 50-day simple moving average lines.

The market capitalization of the stock is $276.03 million, the price-book ratio is 2.98 versus an industry median of 1.62 and the enterprise value-to-Ebitda ratio is -10.27 compared to an industry median of 8.71. The 52-week range is $2.75 to $7.61.

Wall Street has issued an overweight recommendation rating for Lithium Americas Corp., meaning that the stock is expected to outperform either the market or the industry. The average target price of $9.92 reflects a 220% growth from the share price at close Friday.

The 14-day Relative Strength Indicator of 48.48 suggests that the share price is close to oversold levels.

Shares of Nexa Resources S.A. (NYSE:NEXA) were trading at $9.44 at close Friday for a market capitalization of roughly $1.26 billion. The share price results from a 53% decline that occurred over the last 52 weeks through Feb. 15. The company has a debt-equity ratio of 59%. GuruFocus has assigned a financial strength rating of 5 out of 10 and a profitability & growth rating of 4 out of 10.

Nexa Resources SA is a Luxemburg-based zinc, copper, lead mining and smelting company with metal mining interests in Latin America. The company also produces silver and gold.

The share price at close Friday is underneath the 200-, 100- and 50-day simple moving average lines, as illustrated in the GuruFocus chart below.

The price-book ratio is 0.54 versus an industry median of 1.62 and the enterprise value-Ebitda is 4.18 compared to an industry median of 8.71. The 52-week range is $8.22 to $21.18.

Wall Street has issued an overweight recommendation rating for Nexa Resources SA, meaning that the stock is predicted to outperform. The average target price of $15.14 reflects 61.06% growth from share price at close Friday.

The 14-day Relative Strength Indicator of 45.49 suggests that the share price is closer to oversold levels than overbought levels.

The share price of Ferroglobe PLC (NASDAQ:GSM) was $2.16 at close on Friday for a market capitalization of about $371.47 million. The share price decreased 86% for the past year through Feb. 15. The debt-equity ratio is 21% versus an industry median of 35%. GuruFocus has assigned a financial strength rating of 6 out of 10 and a profitability & growth rating of 7 out of 10.

Based in London, Ferroglobe PLC manufactures silicon and specialty metals products that are used in several industries.

The GuruFocus chart below illustrates that the share price at close Friday is under the 200- and 100-day simple moving average lines, though on par with the 50-day SMA line.

The price-book ratio is 0.40 versus an industry median of 1.62 and the enterprise value-Ebitda ratio is 1.54 compared to an industry median of 8.71. The 52-week range is $1.47 to $17.40

Wall Street has issued an overweight recommendation rating for Ferroglobe PLC, meaning that the stock is predicted to outperform either the industry or the overall market. The average target price of $3.90 represents 80.6% upside from share price at close Friday.

The 14-day Relative Strength Indicator of 45.97 is down trending towards oversold levels.

Disclosure: I have no positions in any security mentioned.

About the author:

Alberto Abaterusso
If somebody asks what being a value investor means, Alberto Abaterusso would answer, “The value investor is not just the possessor of the security that represents the company, but he is the owner of that company. As an owner of the company the value investor is actively involved in the dynamics of that company and his first concern is how to have sales progressively growing. Also, the value investor is probably one of the most demanding persons in the world concerning sales.”

Abaterusso is a freelance writer based in The Netherlands. He primarily writes about gold, silver and precious metals mining stocks. His articles have also been widely linked by popular sites, including MarketWatch, Financial Times, 24hGold, Investopedia, Financial.org, CNBS, MSN Money, Zachs, Reuters and others. Alberto holds an MBA from Università degli Studi di Bari (Italy), Aldo Moro.

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