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Should you buy or sell these two popular stocks in the news today?

Mid-cap media group Entertainment One (LSE: GKP) and small-cap UK onshore outfit IGAS Energy (LSE: IGAS) have keen private investor followings, and both companies have released news today.

Shareholders of the two firms have had it hard in recent times. Entertainment One’s shares were trading comfortably above 350p at their peak last year, but closed yesterday at 213p (-30%). IGAS’s fall has been even more painful — from around 150p a couple of years ago to 13.75p (-90%) at yesterday’s close.

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The news out this morning suggests to me that one of these stocks is looking a good buy for recovery, while the other could have further to fall.

Fundamentally undervalued

Entertainment One — whose assets include the Peppa Pig brand, film and television studios and music labels — released an update for the six months ended 30 September, and the shares are modestly higher in morning trading.

The company said operating performance is “on track across all divisions” and that it anticipates full-year numbers “will be in line with management expectations”.

The update also added that an independent valuation of the group’s content library has raised the value to $1.5bn from $1bn. This means that the value of the library alone is in excess not only of the company’s market cap — £914m ($1.2bn) — but also its enterprise value (market cap plus net debt) of £1.1bn ($1.4bn).

As well as looking cheap on an asset valuation, Entertainment One also looks good value on an earnings basis. I’m expecting full-year earnings of around 20p a share, which gives an attractive price-to-earnings ratio of 10.7.

Entertainment One last month received a preliminary proposal from ITV for a possible offer for the company at 236p a share. The board unanimously rejected it on the basis that it “fundamentally undervalues the company and its prospects”. I agree and rate the shares a buy.

A risk too far

I’m afraid I’m not as optimistic about IGAS’s prospects. Indeed, the company has long been on my list of stocks to avoid. If anything, today’s half-year report has left me more negative on the company. And the market agrees, with the shares down over 5%, as I’m writing.

IGAS’s high debt and low cash flow in the prevailing oil environment is a toxic mix. Gross borrowings stand at £111m and net debt at £85m, while the company’s market cap is £39m. Operating cash flow for the period (before working capital movements) was £4.9m, but the cost of servicing the debt was £5.1m.

IGAS said today it expects to breach one of its debt covenants (liquidity) in just a few weeks’ time, and others (leverage) when measured against the balance sheet at the year end. The company has been in discussions with bondholders for months about a waiver of covenants. Even if they consent, it would only be a temporary solution, with the board’s objective being further discussions to agree and implement “appropriate changes to the company’s financing arrangements and/or capital structure.”

I see the risk here of existing shareholders being mullered in a debt-for-equity swap (in the manner happening at Gulf Keystone Petroleum and Xcite Energy) as so high that I can only rate IGAS’s shares a sell.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended ITV. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.