When
Patriot Coal (NYSE:
PCX
)
announced plans to file for bankruptcy this week, investors should
not have been surprised. After all,
shares
had fallen from $20 to $2 in the past year, signaling potential
financial distress in the days and weeks ahead. In fact,
expectations that Patriot Coal would lose $2 a share in 2012 and
again in 2013 should have warned you that a
turnaround
was quite unlikely. Still, for those who still owned the stock at
$2 on Monday morning (July 9), the pain has been significant -- a
100% eventual loss when shares finally become worthless (they
currently trade for 12 cents).
Unfortunately, this won't be the last time we hear about a major
bankruptcy this year. Many other companies are burning through cash
right at a time when it's increasingly difficult to raise fresh
funds.
How to
spot
these troubled companies? Look at the stock price charts. Any stock
that has fallen sharply during the past few years and now trades in
the low single-digits is signaling more distress to come.
Here are a few examples…
1. A123 Systems (Nasdaq:
AONE
)
This company promised to revolutionize the battery industry and
spent hundreds of millions on research and development efforts.
Yet, even though A123 has been public for less than three years,
its future as a
public company
is quite dim. Simply put, the company is unlikely to make money any
time soon -- no matter how impressive its technology base may
be.
The advanced battery
market
is very competitive, and rivals in Asia are far better equipped to
absorb further losses until this market finally matures. A123's
$116 million cash balance may appear adequate, but this company has
burned through at least $300 million in each of the past two years.
Management won't likely wait to declare bankruptcy until the money
is gone. Instead, it may seek protection from creditors during the
months ahead while it still has financial resources to work
with.
2. Zale (NYSE:
ZLC
)
This jewelry retailer has $37 million in the bank. Considering that
Zale generated negative $67 million in
free cash flow
in fiscal (July) 2011 and a cumulative $350 million operating
losses in the past three years, the cash balance doesn't provide a
lot of breathing room -- especially for a company with $446 million
in
long-term debt
.
In a sign of Zale's financial distress, the retailer had to
agree to pay 15% interest rates on a fresh credit line, and that
credit line is backed by the company's
inventory
, which tells you that lenders want a lot of return for their risk,
even with the inventory locked up.
To its credit, Zale's same-store sales have begun to improve.
The question is how much of an improvement. It pays to dig though
the company's fiscal fourth-quarter results, expected to be
released late in the summer, as any further deterioration in the
balance sheet
likely means an eventual date with bankruptcy court.
3. Clearwire (Nasdaq:
CLWR
)
Roughly nine months ago,
I made a bold prediction
for this stock. I thought shares might be worthless by this fall.
Though shares initially moved higher, they have since resumed their
downward trajectory.
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In broad terms, this wireless services company has $1 billion in
cash and $4 billion in debt. For a company that has bled at least
$1 billion in annual free cash flow in each of the past five years
(and roughly $9 billion during that period), that cash level is
hardly assuring.
Clearwire's management has done an impressive job of perpetually
selling stock and issuing yet more debt to keep money in the bank,
but it concedes that the task is getting ever tougher as investors
and lenders balk at pouring even more money into this
sinkhole.
By some estimates, Clearwire has at least three more years of
losses ahead of it. Will this stock really be around long enough to
witness the move into profitability? The stock price chart suggests
that will be quite difficult.
Risks to Consider:
These stocks are tricky to short, as stopgap funding efforts
tend to lead to sharp short-covering.
Action to Take -->
In a sloweconomy , bankers tend to shun making new loans and become
less inclined to look the other way as existing loans start to look
doubtful. These companies are carrying high debt loads at precisely
the wrong time in the economic cycle. Avoid these stocks at all
costs.
-- 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.