Value-focused investors are constantly on the lookout for stocks that are priced below their intrinsic value. Hawaiian Electric Industries Inc (HE, Financial), with its current price of $10.05 and a fair valuation of $50.35 according to its GF Value, appears to be one such stock. Despite recording a loss of 15.3% in a day and a 3-month decrease of 72%, it might seem like an attractive opportunity at first glance.
Understanding the GF Value
The GF Value is a unique metric that represents the current intrinsic value of a stock, calculated based on historical multiples, GuruFocus adjustment factor, and future estimates of business performance. The GF Value Line gives an overview of the fair value that the stock should be traded at. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
The Importance of Deep Analysis
However, before making an investment decision, it's crucial to consider an in-depth analysis of the company. Despite its seemingly attractive valuation, certain risk factors associated with Hawaiian Electric Industries should not be ignored. These risks are reflected through its low Altman Z-score of 0.91, suggesting that Hawaiian Electric Industries, despite its apparent undervaluation, might be a potential value trap. This complexity highlights the importance of thorough due diligence in investment decision-making.
Understanding the Altman Z-Score
The Altman Z-score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. Invented by New York University Professor Edward I. Altman in 1968, the Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
A Closer Look at Hawaiian Electric Industries
Hawaiian Electric Industries is the parent company of three Hawaii-based regulated utilities and Hawaii's American Savings Bank. The utilities provide electricity on the five islands of Oahu, Hawaii, Maui, Molokai, and Lanai. Nearly 40% of electricity in its service territory comes from renewable energy, with the state setting a goal of 100% by 2045. Despite its promising operations, the stock's low Altman Z-score suggests potential financial distress.
Conclusion: A Potential Value Trap
Despite its seemingly attractive valuation, Hawaiian Electric Industries' low Altman Z-score suggests potential financial distress, making it a potential value trap. This underlines the importance of thorough financial analysis and due diligence before making investment decisions. GuruFocus Premium members can find stocks with high Altman Z-Score using the Walter Schloss Screen.
