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Are These 3 Falling Knives Ready to Rebound?

- By Alberto Abaterusso

With its research paper, "Falling Knives Around the World," the Brandes Institute concluded that for the period from 1980 to 2003, U.S. falling knives with lower enterprise value ratios thrashed the S&P 500 index, providing much higher performance. The research also warned that this typology of stocks usually brings a high risk of bankruptcy.


The Brandes Institute is a division of the San Diego-based investment advisory company Brandes Investment Partners. As of Dec. 31, the company manages $24.1 billion worth of assets for institutional and private clients all over the world using the value investing approach.

The Brandes Institute defined falling knives as stocks that depreciated more than 59% over the last 12 months of trading.

Investopedia.com explains that catching a stock at the bottom of its downturn involves the risk of ending up in severe losses, and this risk can be reduced buying the shares as soon as there are signs of a strong upward momentum. The analysis of the relative strength index is useful for this purpose.

I have therefore screened the technology sector as having the highest population of falling knives. I have excluded from my analysis nano and micro caps. Thus, the following stocks have a market capitalization of $300 million or more as of Wednesday.

The first stock is Yirendai Ltd. (YRD). The company is the operator of an online consumer finance marketplace in China. The share price has decreased 75% for the 52 weeks through Jan. 23 as illustrated in below chart. The share price of $10.70 at close Wednesday is under the 200-, 100- and 50-day simple moving average lines. The tech stock has a market capitalization of approximately $647.97 million and an enterprise value-revenue ratio of 0.56 versus an industry median of 5.35. The 52-week range is $9.61 to $44.67.

Yirendai Ltd has a 14-day Relative Strength Indicator of 45.85. Below is a screenshot from the chart of GuruFocus that suggests a high risk for losses.

Source: GuruFocus.com

GuruFocus has assigned to the stock a financial strength rating of 8 out of 10 and a profitability and growth rating of 2 out of 10.

As of January, there are eight analysts who were surveyed on Yirendai Ltd. One analyst has a strong buy on the shares, four analysts suggest buying the shares, two analysts recommend holding the stock and one analyst foresees an underperforming share price within the 52 weeks.

The average price target is $21.22 per share.

During the third quarter of 2018, Chris Davis (Trades, Portfolio) increased his position by 16.77% to 2,235,823 shares.

The second stock is Diebold Nixdorf Inc. (DBD), a North Canton, Ohio-based provider of connected commerce solutions to a wide range of clients worldwide. The share price has declined 77% for the 52 weeks through Jan. 23 and is now trading under the 200-day simple moving average line but slightly above the 100- and 50-SMA lines. The share price of $4.1 at close Wednesday is 3.5% above the 52-week low of $3.96 and 3.7% below the 52-week high of $4.25. The market capitalization is approximately $310.6 million, and the EV-revenue ratio is 0.53 versus an industry median of 2.65.

The 14-Relative Strength Indicator is about 70, and its pattern could anticipate the beginning of an upward trend as shown in below screenshot of the GuruFocus' chart.

Source: GuruFocus.com

GuruFocus.com says that a Z-score of 1.04 ndicates distress zones for Diebold Nixdorf Inc., implying a bankruptcy possibility in the following 48 months. However, a Piotroski F-score of 4 out of 9 is indicating that the financial situation of Diebold Nixdorf Inc. is typical for a stable company.

The financial strength rating is 4 out of 10, and the profitability and growth rating is 6 out of 10.

As of January, two analysts have a strong buy on the shares, four analysts recommend buying the shares and two analysts recommend holding the shares.

The average price target is $5 per share.

During the third quarter of 2018, Mario Gabelli (Trades, Portfolio) increased his position by 7.57% to 6,317,415 shares.

Richard Pzena (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) have sold out.

The third stock is Ultra Clean Holdings Inc. (UCTT), a Hayward, California-based provider of technologies and services for semiconductors. Following a 61% decrease for the 52 weeks through Jan. 23, the share price of $9.2 at close Wednesday is below the 200- and 100-day simple moving average lines but slightly above the 50-SMA line. The 52-week range is $6.94 to $25.3. The market capitalization is approximately $357.76 million, and the EV-revenue ratio is 0.54 compared to an industry median of 1.73.

The 14-day RSI is almost 53. The index is suggesting the stock is neither overbought nor oversold.

Source: GuruFocus.com

GuruFocus.com says that an Altman Z-score of 2.33 could be an indication of grey zones for Ultra Clean Holdings, implying financial stress for this company. A Piotroski F-score of 3 out of 9 is indicating that the financial situation of Ultra Clean Holdings has been affected by a poor business operation.

The financial strength rating is 6 out of 10 and the profitability and growth rating is 6 out of 10.

As of January, one analyst has a strong buy on shares of Ultra Clean Holdings, two analysts recommend buying the shares while two analysts recommend holding the position.

The average price target is $16.8 per share.

Disclosure: I have no positions in any security mentioned.

This article first appeared on GuruFocus.