When shares of companies lose more than 59% of their value in a year, they are called falling knives. These stocks spark the interest of some investors who believe they can make a considerable return following an expected rebound.
This category of investors is also aware that investing in falling knives carries a remarkable risk of a severe loss because the quick detioration in the stock is usually a sign of financial trouble for the company. But investors can reduce such risk if they pick stocks with a moderate to low financial burden, namely, a debt-equity ratio below 0.50.
Having said that, investors should consider the falling knives that have also received an overweight recommendation rating from Wall Street sell-side analysts, which increases expectations for unbelievable returns as the rating indicates these stocks will outperform.
Savara
Shares of Savara Inc. (SVRA, Financial) closed at $1.33 on Monday for a market capitalization of $54.81 million. The stock declined 84% over the last 12 months through Dec. 2.
The Austin, Texas-based biotech developer of orphan drugs for lung diseases has a debt-equity ratio of 0.24, which is above the industry median of 0.11.
GuruFocus assigned a moderate rating of 5.2 out of 10 for the company's financial strength, but a very low rating of 1 out of 10 for its profitability. Thus, investors must be careful with this stock.
The closing price on Monday was below the 200- and 100-day simple moving average lines, but still above the 50-day line. The 52-week range was 69 cents to $11.96.
The price-book ratio is 0.51 compared to the industry median of 3.63.
The 14-day relative strength index of 69 suggests the stock is still far from oversold levels.
Wall Street issued an overweight recommendation rating with an average target price of $5.25, reflecting 304% upside from Monday’s closing share price.
Intelsat
Shares of Intelsat S.A. (I, Financial) closed at $6.24 per share on Monday for a market capitalization of $879.84 million. The stock declined 73% over the past 12 months through Dec. 2.
The Luxemburg-based provider of satellite communication services has a debt-equity ratio of -2.96 versus the industry median of 0.58.
GuruFocus assigned a low rating of 2 out of 10 for the company's financial strength, but a moderate rating of 5 out of 10 for its profitability.
The closing price on Monday was below the 200-, 100- and 50-day simple moving average lines. The 52-week range was $5.55 to $27.29.
The price-sales ratio is 0.42 versus the industry median of 1.41.
The 14-day relative strength index of 19 suggests the stock is oversold.
Wall Street sell-side analysts issued an overweight recommendation rating and have established an average target price of $20.50, reflecting 230% upside from Monday’s closing price.
Disclosure: I have no positions in any securities mentioned.
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