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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.


Encompass Health Corp

The first stock to consider is Encompass Health Corp. (NYSE:EHC), a Birmingham, Alabama-based provider of post-acute health care services to U.S. patients.

An Altman Z-Score of 2.03 combined with a debt-to-equity ratio of 1.88 (versus the industry median of 0.32) suggests that the company is in some kind of financial distress, though the risk of bankruptcy is fairly low. The interest coverage ratio of 4.8 indicates that the company is still able to pay the interest expenses on its outstanding debt for the time being.

GuruFocus has assigned a rating of 8 out of 10 to the company's profitability, driven by an operating margin of 16.33% versus the industry medina of 4.97% and a return on equity (ROE) ratio of 24.17% versus the industry median of 6.3%.

Sell-side analysts have established an average target price of $85.92 per share for the stock, which represents a 37.5% upside from Fridays closing price of $62.50 per share. On Wall Street, the stock has a median recommendation rating of buy.

Encompass Health Corp. pays quarterly dividends, with the last distribution, 28 cents per common share, issued on Jan. 18. The stock grants a forward dividend yield of 1.79% as of Jan. 21.

The stock has declined by 27.1% so far this year, underperforming the S&P 500 by 41.6%, for a market capitalization of $6.22 billion and a 52-week range of $56.31 to $89.68.

2 Risky Picks That Could Pay Off
2 Risky Picks That Could Pay Off

JELD-WEN Holding Inc.

The second stock to consider is JELD-WEN Holding Inc. (NYSE:JELD), a Charlotte, North Carolina-based designer and manufacturer of doors and windows primarily in North America.

An Altman Z-Score of 2.2 combined with a debt-to-equity ratio of 1.88 (versus the industry median of 0.32) and a debt-to-equity ratio of 2.33 (versus the industry median of 0.41) indicates that the company is having financial difficulties, although there is little chance of bankruptcy within two years. The interest coverage ratio of 3.45 means that the company should be able to pay the interest costs on its outstanding debt for the time being.

GuruFocus has assigned a rating of 6 out of 10 for the company's profitability, driven by a return on equity (ROE) ratio of 17.96% versus the industry median of 6.85%.

The share price was $23.86 at close on Jan. 21, which is lower than analysts average target price of $31.31, reflecting a 31.2% potential upside. On Wall Street, the stock has a median recommendation rating of overweight.

JELD-WEN Holding Inc. does not pay dividends.

The stock has dropped 17.45% so far this year, underperforming the S&P 500 by 32%. The stock has a market capitalization of $2.19 billion and a 52-week range of $22.90 to $31.47.

2 Risky Picks That Could Pay Off
2 Risky Picks That Could Pay Off

This article first appeared on GuruFocus.

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