Commercial bankers are a fickle lot. When theeconomy is growing,
they trip over each other to extend loans to anybody with a
business plan. But when theeconomy cools, bankers slam the lending
spigot shut, denying loan applications to any new borrowers while
taking a nervous stance with existing borrowers.
And this can spell trouble for any company that has been
relying on credit lines or any other short-term loans. When
aneconomy slows, bankers look for excuses tocall in these loans
-- especially if a customer looks to be in a weak financial
position.
Well, I've come across 27 companies that are starting to
sweat. They all carry short-term loans (due in 12 months or
less), and right now, they don't have enough cash on hand to come
up with the funds if the bankers come knocking.
Covering their interest expense?
Not only do these firms need to worry about bankers
calling in loans, they also need to keep an eye on theircash
flow . In some instances, these firms are only earning enough
to cover their interest expenses, let alone theprincipal
amount on their loans. These 10 companies have too little
cash on hand -- and they are also generating negative
quarterlycash flow .
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Back in November,
I warned readers
that stocks like
American Apparel (AMEX:
APP
)
were headed for trouble.
I checked back
in around January, once again sounding the alarm bell.
What's happened since then? The stock is hovering around
$0.85, as you can see from the table above, the danger of
bankruptcy is still there.
To assuage bankers, companies need to prove that
they can at least generate enough cash flow to cover
interest payments. These four companies have interest
coverage less than 1.0 (which means that cash flow,
though positive, is less than interest expense).
.png)
Of course, a quarterly snapshot may be unfair.
Companies like
PC Mall (Nasdaq:
MALL
)
may do the bulk of their business every year during
the holidays, so interest coverage can look scary
in a seasonally weak quarter. Still, the company
would need to convince lenders to be patient until
the end of the year rolls around. Having more debt
than cash never makes a banker happy.
There are also companies that generate decent
cash flow now, but must hope the economy doesn't
get much weaker. If sales fall by a moderate
amount, cash flow can often fall at a much faster
rate. These 13 companies have an interestcoverage
ratio between 1.0 and 4.0, which is "good enough"
for now. Then again, every one of them has more
short-term debt than cash, which is never a good
position to be in.
.png)
If the U.S. economy muddles through
and avoidsrecession , then many of these
27 companies will find a way to keep the
bankers at bay, rolling over their debt
into next year. Yet a few of these
companies will likely fall prey to
nervous bankers, and will see their loans
called in.
If the U.S. slumps intorecession ,
then almost every one of these stocks
will be vulnerable to bankers' whims. And
once investors get word that a company
has a problem meeting its debt
obligations, massive sell-offs can
occur.
Risks to Consider:
Some of these stocks already
trade at levels that suggest
imminent financial distress. If
they're able to shore up their weak
balance sheets, short sellers may
boost the stocks byshort covering .
But if you own any of these stocks,
it simply might not be a risk worth
taking.
Action to Take
-->
If you own any of these stocks,
then consider selling them now.
Any one of them could tumble in
a hurry. Instead, a much better
bet for your money right now is
what wecall
"Forever"
stocks
.
In short, these are the only
stocks we know of that you can
buy today and hold for the rest
of your life.
StreetAuthority's
co-founder and Chief
Investment Strategist, Paul
Tracy, has spent the past
several months researching
this opportunity, and he's
put everything you need to
know -- including several
names and ticker symbols --
in a special presentation
called
"
The 10 Best
Stocks to Hold Forever
."
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.