Investors who want to increase their odds of finding a cheap stock that has high potential for outperforming the S&P 500 index should screen for falling knives.
Falling knives are stocks that have declined more than 59% in the last 52 weeks of trading.
Since a sharp depreciation in the market value of a stock can be a sign of financial distress, this process involves the risk of generating severe losses. If investors add a moderate to low debt-equity ratio to their screening, however, they can significantly reduce the risk.
Further, to increase the likelihood of gaining impressive returns, investors should search for value among basic materials stocks because the sector is poised for a rebound as the U.S. and China are expected to reach a trade agreement by the end of March.
The screening produced the following results.Â
The first stock is Century Aluminum Co. (CENX, Financial), a Chicago-based producer of standard-grade and value-added aluminium.
Shares closed at $7.64 on Friday following a 63% decline over the past year through March 8. The company has a debt-equity ratio of 37% versus an industry median of 34%.
GuruFocus has assigned a financial strength rating of 5 out of 10 and a profitability and growth rating of 4 out of 10.
Century Aluminum has a market capitalization of $678.4 million.
The closing price on Friday was below the 200, 100 and 50-day simple moving average lines. The 52-week range is $6.54 to $22.94.
The company has a price-book ratio of 0.89 versus an industry median of 1.62 and an enterprise value-to-earnings before interest, taxes, depreciation and amortization ratio of 21.99 compared to an industry median of 8.71.
Wall Street issued an overweight recommendation rating for Century Aluminum, which means the stock is expected to outperform either the market or the industry. The average target price of $11.29 reflects a nearly 47% upside from the closing price on Friday.
The 14-day relative strength index of 32.76 suggests the stock is close to oversold levels.
The second company is Core Molding Technologies Inc. (CMT, Financial), a Columbus, Ohio-based manufacturer of sheet molding compound products and fiberglass reinforced plastics.
Shares closed at $7 on Friday following a 60% decline for the past 52 weeks through March 8. The stock has a debt-equity ratio of 41% versus an industry median of 52%.
GuruFocus has assigned a rating of 5 out of 10 for financial strength and for profitability and growth.
Core Molding has a $57.42 million market cap.
The closing price on Friday was below the 200, 100 and 50-day SMA lines. The 52-week range is $6.37 to $19.87.
The company has a price-book ratio of 0.54 versus an industry median of 1.26 and an EV-EBITDA ratio of 9.49 versus an industry median of 8.37.
The 14-day relative strength indicator of 24.66 suggests the stock has reached oversold levels.
Disclosure: I have no positions in any securities mentioned.
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