Stocks to sell

Scores of technology stocks have been hit hard in the past year, but Exela Technologies (NASDAQ:XELA) in particular has really taken a tumble. Over the last twelve months, XELA stock has plunged by nearly 99.6%.

Investors who have held onto it since last year have likely written it off as a total loss. Yet with its current bottom-barrel price, many speculators may be dabbling in the outsourced service provider’s shares. Mostly, in the hopes that an ounce of improvement could result in a ton of upside from here.

However, just because XELA now sells for pennies per share doesn’t mean that it’s a bargain. In fact, today’s valuation may not fully reflect the extent to which this company’s fundamentals have deteriorated.

With this in mind, let’s dive in, and see why it’s best to stay as far away as you can from this penny stock.

XELA Exela Technologies $0.061

Why Low-Priced XELA Stock is Far From Cheap

At first glance, Exela may seem like a bargain. Trading for less than a dime per share, XELA’s market cap is only $7.4 million. That may seem too low, given that this company’s business generates over $1.1 billion in annual revenue.

However, while Exela may be a large enterprise, it’s definitely not a profitable one. As you may have noticed above, I called the company an “outsourced services provider” rather than a “business process automation firm,” a descriptor commonly used when discussing XELA stock.

Despite its reputation as a tech stock, Exela continues to primarily be a provider of low-tech, labor-intensive back office services. With high fixed costs made worse by high inflation, a slight decline in revenue has had a severe impact on its profitability over the past year. Previously generating positive (albeit barely breakeven) operating income, in the most twelve months, Exela has reported operating losses of $58 million.

Adding in this highly-leveraged firm’s debt service expenses, plus asset impairments and its losses are even more staggering. In total, the company lost a total of $298 million in the past year. Put simply, it’s no mystery why the market is assigning essentially zero value to Exela’s equity.

A Possible Delisting is the Least of Exela’s Problems

Recently, much of the discussion about XELA stock has revolved around one thing: delisting risk. As InvestorPlace’s William White wrote on Feb. 7, the company is currently working to get back into compliance with the Nasdaq exchange.

However, I wouldn’t worry too much about the potential for XELA to move from the Nasdaq down to the over-the-counter (or OTC) market. This would of course be a negative for shares, but there’s a much more severe risk that looms over the stock: bankruptcy risk.

Based on earnings forecasts, Exela isn’t expected to get out of the red anytime soon. Just recently, the company disclosed that it had skipped out on interest payments for some of its debt. Although not certain, this may be a sign the company is considering filing for Chapter 11, necessitating the need to conserve what remains of its cash.

Even if bankruptcy isn’t imminent, Exela may be pursuing a resolution for this issue that will be a negative for shareholders. In the same filing where it disclosed missing the debt payment, the company disclosed it is talking with “third-party sources of liquidity.”

Bottom Line

“Third-party sources of liquidity” could provide Exela with an urgent lifeline. However, more likely than not, this is just a fancy way of saying that a dilutive capital infusion may be underway.

Sure, one could counter that the low valuation of XELA already factors in dilution risk. Even so, keep in mind that one infusion alone likely will not solve all of Exela’s financial woes.

With around $1.16 billion in outstanding debt, even if Exela was able to raise the additional equity, the resultant dilution would be just as damaging as a Chapter 11 filing. Given the company’s high operating losses, it’s doubtful too many institutional investors will be willing to throw good money into this bad situation.

XELA stock may trade for only a few pennies per share, but it has a greater chance of falling to zero, than soaring back to substantially higher prices.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.

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