Falling knives are stocks whose share prices have fallen more than 59% over the last 52 weeks. Some investors are interested in these stocks because they believe they will reward them with impressive margins once they have rebounded.
Investors are also aware that such a share price depreciation can be a sign of financial distress, which will cause a major loss if it turns to bankruptcy. The risk is very high with this kind of investment, but can be substantially reduced if investors consider only those falling knives with a moderate to low debt-to-equity ratio and a market cap above $50 million.
Stocks with low to moderate debt-equity ratios were also considered.
With these criteria in mind, I ran my screening. The results also include companies that received a recommendation rating of overweight to buy from Wall Street, increasing the chances of a successful bet.
In addition, I screened the oil and gas sector as an increase in the consumption of energy following the eventual construction of the U.S. barrier along the border with Mexico should produce a boost in the operating income of these companies, driving the share price up.
Chaparral Energy Inc. (CHAP, Financial) closed at $4.2 per share on Tuesday after an 80% decline over the past year through May 21, sending the price below the 200-, 100- and 50-day simple moving average lines. The closing price on Tuesday was 2.4% off the 52-week low of $4.10 and 395.2% from the 52-week high of $20.80.
The Oklahoma City-based oil and gas producer has a market capitalization of $194.63 million. The price-book ratio is 0.25 versus the industry median of 1.3 and the enterprise value-earnings before interest, taxes, depreciaiton and amortization ratio is 11.26 compared to the industry median of 7.99.
Accoridng to GuruFocus, Chaparral Energy’s total debt-equity ratio is 43% versus the industry median of 46%. It is ranked higher than 171 out of a total of 301 companies operating in the industry.
Wall Street issued a buy recommendation rating with an average target price of $18.38, reflecting 338% upside from the closing price on Tuesday.
The 14-day relative strength index of 31 suggests the stock is near oversold levels.
Shares of HighPoint Resources Corp. (HPR, Financial) closed at $2.3 on Tuesday for a market capitalization of $491.65 million. The stock decreased 67% over the past year through May 21, sending the share price below the 200-, 100- and 50-day simple moving average lines. The closing price on Tuesday was 11.7% above the 52-week low of $2.06 and 215.2% below the 52-week high of $7.25.
Headquartered in Denver, HighPoint Resources is a developer of mineral resources and a producer of oil and natural gas in the U.S.
The stock has a price-earnings ratio of 9.57 versus the industry median of 11.83, a price-book ratio of 0.44 versus the industry median of 1.3 and an enterprise value-Ebitda ratio of 3.39 compared to the industry median of 7.99.
HighPoint Resources’ total debt-equity ratio is 62% versus the industry median of 46%. According to GuruFocus, it is ranked lower than 226 out of a total of 301 operators in the industry.
Wall Street issued an overweight recommendation rating, meaning the stock is expected to outperform the market within 12 months. The average target price is $4.97, which represents 116.1% upside from Tuesday 's closing price.
The 14-day relative strength index of 42 suggests the stock is neither overbought nor oversold.
Disclosure: I have no positions in any securities mentioned.
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