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Consider These 2 Falling Knives

- By Alberto Abaterusso

Some investors look for value among falling knives, believing these companies, whose share prices have tumbled more than 59% over the last 52 weeks, could outperform the overall market if they rebound.

Since a sharp decline in the share price may signal financial distress, investing in falling knives carries a high risk of generating severe losses. Investors, however, can significantly reduce this risk if they add a moderate to low debt-equity ratio to their screening criteria.


In addition, the following stocks have received an overweight recommendation rating from analysts, which means they are projected to outperform within the next 52 weeks.

The screening produced the following results.

The first company is BBVA Banco Frances S.A. (BFR), a Buenos Aires, Argentina-based bank that offers a broad range of financial services to individual customers as well as small- and medium-sized companies in the Americas, Spain and Eurasia.

Shares closed at $8.63 on Thursday following a 62% decline over the past year through April 18. The company has a debt-equity ratio of 21% versus an industry median of 68%.

GuruFocus assigned a financial strength rating of 5 out of 10 and a profitability and growth rating of 4 out of 10.

BBVA Banco Frances has a market capitalization of $1.94 billion.

The closing price on Thursday was below the 200-, 100- and 50-day simple moving average lines. The 52-week range is $7.11 to $22.94.

The company has a price-earnings ratio of 7.8 versus the industry median of 12.36, a price-book ratio of 1.94 versus an industry median of 1.11 and a price-sales ratio of 2.37 compared to the industry median of 3.01.

The bank has an average target price of $12.65, which reflects 46.6% upside from the closing price on Thursday.

The 14-day relative strength index of 43.58 suggests the stock is close to oversold levels.

The second company is Ring Energy Inc. (REI), a Midland, Texas-based oil and gas producer.

Following a 68% decline over the past 52 weeks, s hares closed at $5.26 on Thursday. The stock has a debt-equity ratio of 9% versus an industry median of 46%.

GuruFocus assigned a rating of 6 out of 10 for financial strength as well as profitability and growth.

Ring Energy has a $356.68 million market cap.

The closing price on Thursday was below the 200-, 100- and 50-day simple moving average lines. The 52-week range is $4.01 to $17.35.

The company has a price-earnings ratio of 35.06 versus an industry median of 11.83, a price-book ratio of 0.75 versus an industry median of 1.3 and an enterprise value-earnings before interest, taxes, depreciation and amortization ratio of 8.86 versus an industry median of 7.99.

Ring Energy has an average target price of $9.8, reflecting 85% upside from the closing price on Thursday.

The 14-day relative strength indicator of 35.66 suggests the stock is approaching oversold levels.

Disclosure: I have no positions in any securities mentioned.

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This article first appeared on GuruFocus.