Just 14 months ago, the U.S. economic outlook appeared fairly
dire, leading stocks to plunge in late July and early August 2011.
As it turns out, it was a false alarm: The S&P 500 has risen
29% since then. This kind of move is all the more remarkable when
you consider that the U.S.economy remains in a funk. With the
exception of the fourth quarter of 2011, the U.S. economy has
failed to grow in excess of 2%.
The 2% level is a crucial point for the U.S. economy. When the
economy grows above this rate, companies' sales and profits can
expand. Equally important: Bankers start to relax, issuing more
loans and showing more tolerance for companies that may be dealing
with a too-highdebt load .
Yet here's the bad news: the economy started to slow in the
second quarter of 2012, growing just 1.3%. This figure was just
revised -- economists initially thought the economy had grown at a
1.7% pace. And it's unlikely to get better any time soon. The
U.S.Commerce Department just announced that orders fordurable goods
fell 13% in August 2012 compared to a year ago. This is the biggest
decrease since January 2009 and the lowest dollar figure for new
orders since February 2011.
The outlook for gross domestic product growth in the quarters
ahead: Weak. The U.S. economy is on track to post a mere 1.5%
growth in 2012, and
in light of the fiscal cliff
and other headwinds, might do even more poorly in 2013.
That may augur in a sea-change in the world of lending officers.
Not only will those folks be less inclined to issue new loans, but
they may look to pull the plug andcall in existing loans if they
slip out of legal restrictions, known as "debt covenants."
Against such a backdrop, I think it's prudent to start tracking
the companies that are vulnerable to a weak economy. These are
firms that carry too much debt (especially of the short-term kind)
or too little cash to handle still-negative operating cash flows.
If these companies hit a cash crunch, then the bankers may be of no
help, pushing their stock prices toward zero.
Starting with this column, I'll provide an ongoing look at some
of our nation's most vulnerable companies. I'll also provide a
handy gauge that anticipates just how likely a company is to tumble
In this column, I'll first take a brief look at potential
bankruptcy candidates I've looked at in the past. And in coming
weeks and months, I'll be adding to this list, tracking all of them
until they take steps to sharply improve their balance sheets, or
the U.S. economy starts to grow at a more robust pace.
1. Clearwire (Nasdaq:
Bankruptcy Score: 5
This stock slots in between the 4 and 6 readings laid out above.
The troubled telecom service provider has managed to keep issuing
debt and equity to help fund hundreds of millions in annual
operating losses. I first profiled this company's woes
in August 2010
when itsshares traded above $8. They fell below $1 in late July,
which is often a key tell for a possible bankruptcy filing, but
management has helped stem the bleeding for now by noting it its
most recent10-Q that it "had sufficient cash to fund near-term
liquidity needs… for at least the next 12 months." Shares currently
trade around $1.30.
Also in its favor, Clearwire owns valuable wireless spectrum,
which could be sold to pay off debts. Trouble is, Clearwire has
more than $4 billion in debt (and annual interest expense of more
than $500 million), and even such a bigasset sale may not wipe out
that debt load completely. The quarters ahead will be crucial:
Clearwire needs to start taking dramatic action, such as an asset
sale, if is to avoid a date with a bankruptcy judge.
2. American Apparel (NYSE:
Bankruptcy Score: 4
I profiled the rising risk of bankruptcy for this retailer
back in January
, but shares have actually moved higher instead of lower, recently
crossing $1.50 for the first time in 19 months. This turned out to
be a tough stock to short, as furious recent short-covering
activity can attest. The share price rebound is due to a series of
management pronouncements that sales are rising and that 2012EBITDA
should be robust, perhaps approaching $40 million.
Yet despite appearances, this company is far from being out of
the woods. Management likes to talk about surgingcash flow , but
thebalance sheet looks ever weaker. Here's a snapshot of the
balance sheet in recent periods.
As you can see, despite several quarters ofbullish press
releases about sales growth and rising EBITDA, the balance sheet is
I'm feeling charitable and will give this retailer a "4," which
means significant shareholderdilution may lie ahead. But if the
balance sheet gets any weaker, then this stock will quickly get
bumped up to a "6."
3. Coldwater Creek (Nasdaq:
Bankruptcy Score: 5
This struggling retailer just bought itself more time after
borrowing another $65 million to stay afloat in July 2012. It now
has $45 million in the bank, removing any bankruptcy concerns for
this year. But it's imperative that sales trends start to improve.
Same-store sales have been very weak for several years, leading
management to close the weakest stores while sprucing up the
merchandise in existing stores.
Those steps need to show an immediate payoff. Coldwater Creek
generated negativefree cash flow of $32 million in fiscal
(January) 2011 and another negative $53 million in fiscal 2012. A
similar cashburn rate in the quarters ahead would cause that $45
million in cash to dissipate quickly, so it's unlikely the company
will then be able to line up yet more loans, as it did this
Risks to Consider:
As an upside risk, debt-burdened companies can look to sell
stock to raise cash, though the dilution associated with such moves
can push shares well lower.
Action to Take -->
In this slow-growing economy, you need to watch corporate balance
sheets more closely than ever. If a company's debt load remains
unaddressed while the economy remains weak, then shareholders could
end up paying a stiff price. You wouldn't want to own any of the
stocks I've mentioned here, unless your research shows that
aturnaround is possible and you're willing to stomach the risk.
That's a risky proposition -- even for the most risk-tolerant
-- 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.
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