Please ensure Javascript is enabled for purposes of website accessibility

3 Distressed Stocks for Contrarian Investors to Buy in April

By Zhiyuan Sun - Apr 10, 2021 at 5:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Looking for outside-the-box investments in an overvalued market? Here are your best bets.

Despite a rather overvalued market, there are a surprising number of good companies in trouble trading at bargain valuations. Many are still up for grabs, as investors would rather pay a high price for companies that are steadily growing their cash flows than pay for ones having temporary problems with theirs. 

People can, however, be just as profitable with their investments when they bet against a trend rather than go with it. Today, let's look at why brave investors can benefit from going long on shares of AMC Entertainment Holdings (AMC 2.02%)Bausch Health (BHC -3.62%), and Aurora Cannabis (ACB -8.05%)

Man holding a lit lightbulb

Image source: Getty Images.

1. AMC Entertainment Holdings

Theater chain AMC Entertainment Holdings has had a rough time after it had to cease operations for months because of COVID-19-related restrictions. Last year, its revenue decreased by 77.3% from 2019, to $1.24 billion, while its net loss increased by a stunning 4,440.3% over the same period to $4.59 billion. 

At this point, investors are probably wondering why this isn't a stock to stay away from at all costs. The answer is that AMC has a market cap of just $4.3 billion. When theaters reopen to full capacity and AMC sees its sales and earnings return to pre-pandemic levels, its stock would be grossly undervalued.  

With the rapid pace of vaccination programs, AMC has already reopened 99% of its theaters and is operating them between 25% and 100% capacity. What's more, the company recently raised $2.8 billion in cash while securing another $1 billion in debt concessions from theater landlords and creditors. That's good news, as it offsets much of its $5 billion in long-term debt.  

The company also plans a sale of 500 million shares of stock, which would be enough to give it another year of liquidity at current stock prices and cash burn rate. While no shareholders want to see stock dilutions, AMC was a solid business before the pandemic and really needs the cash to push through. In 2019, it had as much as $5.47 billion in sales and $579 million in cash flow from operations. Hence, this is probably the top contrarian stock to buy now.  

2. Bausch Health

Trading at just 14 times free cash flow and 1.4 times revenue, Bausch Health is one of the cheapest healthcare stocks out there. However, one can easily see why this is, as it currently has a staggering $24.185 billion in long-term debt on its balance sheet. In comparison, the company generated only $8.027 billion in revenue and $3.294 billion in operating income less non-cash items (EBITDA) last year. 

The company formed as a result of leveraged acquisitions of its contact lens subsidiary Bausch & Lomb, gastroenterology drugmaker Salix, and various dermatological and neurology firms. Healthcare platform companies were popular in the mid-2010s, as drug prices were soaring then. However, when they stopped increasing, firms like Bausch Health were left with substantial debt piles and declining revenue.

Bausch Health projects it will return to growth this year, with yearly revenue and EBITDA growth of 8.4% and 5.5%, respectively. Despite the odds, the company still paid back $900 million in debt last year with cash flow from operations. In addition, it recently announced the sale of subsidiary Amoun Pharmaceuticals for $740 million. Amoun is the largest manufacturer of generic drugs and animal health products in Egypt.

As long as the company continues to deleverage, it can simply refinance its debts when they come due and continue business as usual. Moreover, Bausch Health announced it would spin off Bausch & Lomb into a separately traded public entity by the end of this year. That should further separate the company's debt obligations. For all these reasons, Bausch Health is definitely one bargain healthcare stock to be on the lookout for. 

3. Aurora Cannabis 

Aurora Cannabis has been struggling for some time, after the company badly overforecast pot demand in Canada. It invested in state-of-the-art facilities to become the No. 1 Canadian cannabis producer by volume and saw massive losses when the market it anticipated never arrived. Last year, the company had to close down many of its growing operations, taking billions in losses. 

The company's operations have stabilized somewhat. In the six months ended Dec. 31, Aurora's revenue increased by 5% year over year to CA$135.49 million. At the same time, its net loss narrowed to CA$89.374 million from CA$201.446 million during the same period last year.  

That's not all: Aurora Cannabis has become the No. 1 supplier of medical marijuana. The company also has a robust international segment that is growing its sales by 84% year over year. In the U.S., Aurora's CBD brands rank No. 2 in the country by consumer popularity, with the first spot going to Charlotte's Web (CWBHF -12.27%).  

Right now, Aurora Cannabis stock is trading at only 5 times revenue. It's a relatively reasonable price to pay, considering the company improved its sales by 22.73% in the most recent quarter. In addition, the company is doing well with its capital management, with about CA$565 million in cash and equivalents to offset CA$493.37 million in debt and convertibles. Overall, this is a marijuana company on the brink of a turnaround that you don't want to miss.  

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Bausch Health Companies Inc. Stock Quote
Bausch Health Companies Inc.
BHC
$8.51 (-3.62%) $0.32
AMC Entertainment Holdings, Inc. Stock Quote
AMC Entertainment Holdings, Inc.
AMC
$13.65 (2.02%) $0.27
Aurora Cannabis Stock Quote
Aurora Cannabis
ACB
$1.37 (-8.05%) $0.12
Charlotte's Web Holdings, Inc. Stock Quote
Charlotte's Web Holdings, Inc.
CWBHF
$0.44 (-12.27%) $0.06

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
319%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.