2 Risky Picks That Could Pay Off
The following two stocks have underperformed the broader market recently. They are also in financial distress, as represented by low Altman Z-Scores, meaning that they could go bankrupt within the next two years.
Nonetheless, their ability to generate profits seems to be good, as signaled by GuruFocus profitability ratings of at least 5 out of 10. These stocks also hold positive recommendation ratings on Wall Street, which means that sell-side analysts believe that these companies have the potential to continue growing their stock prices, though investors should be on guard in case things start to get worse.
U.S. Xpress Enterprises Inc.
The first stock to consider is U.S. Xpress Enterprises Inc. (NYSE:USX), a Chattanooga, Tennessee-based trucking services provider in the U.S. that operates approximately 6,500 tractors and 13,000 trailers.
An Altman Z-Score of 1.74 combined with a debt-to-equity ratio of 2.27 (versus the industry median of 0.6) suggests that the company is in some kind of financial distress, though the risk of bankruptcy is fairly low. The interest coverage ratio of 2.57 indicates that the company is still able to pay the interest expenses on its outstanding debt for the time being, but the margin of safety is narrow.
GuruFocus has assigned a rating of 5 out of 10 to the company's profitability, driven by a return on equity (ROE) ratio of 8.86% versus the industry median of 6.58%.
Sell-side analysts have established an average target price of $9 per share for the stock, which represents a 77.9% upside from Tuesdays closing price. Analysts have recommended three strong buys and one buy recommendation rating for the stock.
The stock has declined by 25.21% so far this year, underperforming the S&P 500 by 48.6%, for a market capitalization of $247.38 million and a 52-week range of $4.84 to $12.33. U.S. Xpress Enterprises Inc. does not pay dividends.
KNOT Offshore Partners LP
The second stock to consider is KNOT Offshore Partners LP (NYSE:KNOP), an Aberdeen, U.K.-based operator of a fleet of 17 shuttle tankers for the transportation of crude oil under long-term charter across the North Sea and Brazilian waters.
An Altman Z-Score of 0.55 combined with a cash-debt ratio of 0.07 (versus the industry median of 38) and a debt-to-equity ratio of 1.49 (versus the industry median of 0.6) indicates that the company is in financial distress and has a high chance to go bankrupt within two years. The interest coverage ratio of 4.07 means that the company should be able to keep paying the interest expenses on its outstanding debt for the time being.
GuruFocus has assigned a rating of 7 out of 10 for the company's profitability, driven by an operating margin of 38.51% (versus the industry median of 5.62%) and a three-year revenue growth rate of 8.5% (versus the industry median of -1.6%).
The share price was $12.84 at close on Dec. 14, which is lower than analysts average target price of $22, reflecting a 71.33% potential upside. Analysts have recommended two buys and four hold recommendation ratings for the stock.
The stock has dropped 14.4% so far this year, underperforming the S&P 500 by 37.8%. The stock has a market capitalization of $431.20 million, a 52-week range of $12.34 to $20.34 and a forward dividend yield of 16.2%. The next quarterly dividend per share of $0.52 is scheduled for Feb. 11, 2022.
This article first appeared on GuruFocus.
