10 Dangerous Stocks to Avoid 64 comments
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Companies with high leverage ratios stand to make good profits in booming economic times, as they can afford to maximize their output to meet budding demand. However, they are more vulnerable during recessions when sales typically slow and can be insufficient to cover interest expenses. During periods of slow or negative revenue growth, massive interest expenses can also lead to volatile earnings results from one quarter to the next, making the stock less popular among investors.
The chart below highlights 4 of the 10 companies we’ve chosen to highlight whose long-term debt/equity ratios have climbed substantially in the last year and are high relative to their historical average.
The full list of non-financial “dangerous stocks” is shown below.
Readers must note that we chose these stocks because they also received sell recommendations by our Ranking System for the month of April.
The chart below shows that the net percentage of banks tightening lending standards on commercial and industrial loans remains high. Despite the government’s efforts to spur lending activity, it is doubtful that this serious problem will be corrected immediately. Thus in addition to high earnings volatility and the increased threat of not being able to cover interest charges when sales are weakening, companies who depend heavily on debt also face operational risk as it is still difficult to access capital to fund day-to-day operations. As a result, stay clear of these stocks until they lower their operating leverage or economic conditions improve.
*Source: The Federal Reserve
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This article has 64 comments:
Now if you are in a regulated or solid business situation such as a utility or Rail Road (these rail roads folks are on the uptick due to the spiking energy costs of trucking and need for commodity exports coal grain etc) leverage at a less than zero cost makes a lot of sense. The utilities are guaranteed a profit if they are a regulated outfit so they will get their interest back no matter. ( This is not true for 3rd party producers.)
The rail roads do have pricing control outside their contractual agreements and here, unless they are fools, they should have themselves covered for inflation.
If you do not think we are in an inflationary environment google Shadowstats . what is going down other than housing ?
Food no, Medical no, education no, labor no, energy no, enertainment no, clothing perhaps a trifle, rent no, taxes, no . The BLS is cooking the figures. Since Clinton they have been lying to us.
By TONY REID - H&R Staff Writer
DECATUR - With orders slumping, Caterpillar Inc. put its layoff plans into top gear Thursday and began telling more than 1,000 production workers their jobs had ended two weeks earlier than planned.
The company had announced Jan. 30 that 1,026 production employees would be laid off April 13 as part of a package of job cuts.
But with little for them to do as the global recession continues to erode demand for Caterpillar's giant mining trucks and earth moving machines, the company decided there was no point waiting for April 13. It says all the workers will be paid through the 13th, however, and not lose any money as a result of the decision to end their jobs early.
"We began notifying employees that, while we obviously greatly appreciate their work and all of their efforts, we at this point don't have work for them at the facility," said Caterpillar spokesman, Jim Dugan. "As a result, we are releasing them ahead of that April 13 deadline. We began notifying workers on third shift and were continuing to do so throughout the day (Thursday)".
Those workers are emerging into a local economy already filled with people looking for jobs. Unemployment data released earlier this week showed jobless totals in the Decatur area running at 10 percent, the first time the figure has been that high since 1992, and a more than 3 percent rise over the statistics from a year ago.
With these Caterpillar workers now being added to the totals, the numbers for March are set to be even worse.
Dugan said, however, there was little point making employees show up for jobs that weren't there anymore. "Rather than having them come in and having nothing to do, wasting their time quite honestly and having to pay the costs of driving in and so forth, we thought it would be better if they were free to look for another job or training," he added.
When a similar situation arose at a Caterpillar plant in Grenoble, France, this week, workers took the company's chief executive and other senior management hostage. News reports said they were subjected to "shouted threats" and "a night of pounding revolutionary rock music." They were held for 24 hours until French President Nicholas Sarkozy promised he would meet with the workers and save their factory.
Asked to comment on the French situation, Dugan said the company was "very disappointed" that it had happened. "And it's not appropriate anywhere in the world as far as we are concerned," he added.
For example: COP - LT debt=27 bil, Sh equity=55 bil - doesn't look highly leveraged to me. Apart from 4 bil in retirement obligations, all other non-current liabilities are tied to LT assets.
blind screening is just a scratch of the surface and not only useless but it can be very misleading.
At www.SuperStockScreener... we employ an extensively backtested investment process to help us determine whether or not a stock is a Strong Buy, Buy, Hold/Sell, Sell or Strong Sell. This process has provided us with an exceptional real-time track record over the years (relative to the market, since like everyone else, we too lost money in absolute terms during the current bear market). For background information about this process, and its excellent track record, please follow this link:
www.superstockscreener.../
In the article, we focused on companies with mounting long-term debt-to-equity ratios. However, this was not our only consideration when choosing these names to beat up on. Rather, the debt issue was simply an add-on to sell recommendations which we already have high conviction in.
The Super Stock Screener team
Some things I like about IBM include
1) Software and services steady recurring revenues
2) strong financial position
3) large generation of free cash flow
4) High Return on Equity
5) IBM has weathered the worst of this downturn and continued to grow earnings.
On the other hand it isnt hard to believe that Caterpillar and Marriott can have some hard shareholder times.
I read SA because articles like this challenge my beliefs and forces me to consider other perspectives. thanks!
You are right. Leverage can be a good or a bad thing. It must be investigated. So let's see what is under the covers of IBM during the period you show the most dramatic increase in their debt to equity ratios between 2007 and 2008.
The ratio can change higher by debt rising or the equity position falling. Debt rising occurs from taking on more debt ( more troublesome might be exchanging higher coast debt for lower cost debt but we won't digress since that didn't happen). The dollar amount of stock holders equity can fall due to a fall in the price of stock or reducing the number outstanding shares.
During 2008, IBM issued $13.8B new long term debt and retired $10B for a net increase of $3.8B in debt. That would increase their LT Debt to Equity ratio. They also repurchased $10.6B worth of equity. The result of both would decrease their debt to equity ratio so why did it increase? Oh. yea! The price of the stock must have dropped some during 2008. Between January 2nd and December 31st 2008, IBM stock fell over 18% (it actually had a 45% swing from high to low during the year) So. IBM is making positive moves in their capital structure but being penalized in the capital markets.
Perhaps a better way to look at the possible consequences of a high debt to equity ratio is to look at how well IBM can afford the level of debt it has taken on. Let's see. Between 2007 and 2008 , IBM's Gross Income has risen from $41.3B to $45.34B, EBIT increased 18% from $15.1B to 17.4B, Net Cash Flow from operations increased 17% from $16B to $18.8B, Capital surplus increased from $34.8B to $38.8B and Retained earnings grew from $60.7B to $70.35B. And most important, their interest coverage ratio is 25.8 times. It doesn't seem to be an issue for IBM to pay it's Long Term Debt obligations, nor does it seem that their Income Statement, Balance Sheet, Capital Structure or Cash Flow would give ANY bank or lender pause.
I wouldn't be surprised to see you didn't do your homework on any of the other stocks as well. I suggest you find a different advertisement of the advice you have to offer from your web site........... (In full disclosure, I own COP, IBM and ETP(closely related to EPD), all for different reasons but for reasons based on research and analysis of fundamental and technical reasons. That is the bottoms up part.)
This phenomenon has been so since before General Merchandising Corporation, "GEMCO", sold its business guts to protect its senior management (in the end they were fired by a new board). Though I am sure GEMCO was not the first company to be sacrificed on the alter of hired managements perfidy and duplicity, it certainly won't be won't be the last.
Very intuitive look at what can only be a difficult task in the best of times, and certainly so now. I had a client recently who wanted to use the equity in their homes (via a reverse mortgage) to invest in the markets.
On the one hand (personally speaking) I'll take some risk, however when dealing with clients I can't in good conscience advise them to use borrowed money for investments. On the flip side, it not actually borrowed (in a way) since it's the equity in their home, and money they have paid in, and inflation has carried to lofty heights.
You certainly have a valid point on the free money scenario, unless you factor in risk. I'm not adverse to risk, yet it is something all investors, even conservative ones must factor in (based on the recent mutual fund collapse).
While free money is great, make certain to NOT "let it ride", and pay it back as soon as possible. At that point, then you are truly riding a wave of growth on free money.
On Apr 03 10:09 AM bindlepete wrote:
> This is a pretty silly analysis in one regard. True, leverage can
> work against you in hard times but when interest rates are well below
> the inflation rates it could well be a time to borrow as it is essentially
> "free" money. Pay it back with peanuts.
>
> Now if you are in a regulated or solid business situation such as
> a utility or Rail Road (these rail roads folks are on the uptick
> due to the spiking energy costs of trucking and need for commodity
> exports coal grain etc) leverage at a less than zero cost makes a
> lot of sense. The utilities are guaranteed a profit if they are a
> regulated outfit so they will get their interest back no matter.
> ( This is not true for 3rd party producers.)
>
> The rail roads do have pricing control outside their contractual
> agreements and here, unless they are fools, they should have themselves
> covered for inflation.
>
> If you do not think we are in an inflationary environment google
> Shadowstats . what is going down other than housing ?
>
> Food no, Medical no, education no, labor no, energy no, enertainment
> no, clothing perhaps a trifle, rent no, taxes, no . The BLS is cooking
> the figures. Since Clinton they have been lying to us.
Anything can happen nowadays,
and you know that.
On Apr 04 11:01 AM Sanitychecker wrote:
> Let me guess you are short some or all of these stocks. Naked short?
> You may want to reevaluate that decision on some or all of them.
>
>
> You are right. Leverage can be a good or a bad thing. It must be
> investigated. So let's see what is under the covers of IBM during
> the period you show the most dramatic increase in their debt to equity
> ratios between 2007 and 2008.
>
> The ratio can change higher by debt rising or the equity position
> falling. Debt rising occurs from taking on more debt ( more troublesome
> might be exchanging higher coast debt for lower cost debt but we
> won't digress since that didn't happen). The dollar amount of stock
> holders equity can fall due to a fall in the price of stock or reducing
> the number outstanding shares.
>
> During 2008, IBM issued $13.8B new long term debt and retired $10B
> for a net increase of $3.8B in debt. That would increase their LT
> Debt to Equity ratio. They also repurchased $10.6B worth of equity.
> The result of both would decrease their debt to equity ratio so why
> did it increase? Oh. yea! The price of the stock must have dropped
> some during 2008. Between January 2nd and December 31st 2008, IBM
> stock fell over 18% (it actually had a 45% swing from high to low
> during the year) So. IBM is making positive moves in their capital
> structure but being penalized in the capital markets.
>
> Perhaps a better way to look at the possible consequences of a high
> debt to equity ratio is to look at how well IBM can afford the level
> of debt it has taken on. Let's see. Between 2007 and 2008 , IBM's
> Gross Income has risen from $41.3B to $45.34B, EBIT increased 18%
> from $15.1B to 17.4B, Net Cash Flow from operations increased 17%
> from $16B to $18.8B, Capital surplus increased from $34.8B to $38.8B
> and Retained earnings grew from $60.7B to $70.35B. And most important,
> their interest coverage ratio is 25.8 times. It doesn't seem to
> be an issue for IBM to pay it's Long Term Debt obligations, nor does
> it seem that their Income Statement, Balance Sheet, Capital Structure
> or Cash Flow would give ANY bank or lender pause.
>
> I wouldn't be surprised to see you didn't do your homework on any
> of the other stocks as well. I suggest you find a different advertisement
> of the advice you have to offer from your web site........... (In
> full disclosure, I own COP, IBM and ETP(closely related to EPD),
> all for different reasons but for reasons based on research and analysis
> of fundamental and technical reasons. That is the bottoms up part.)
I won't read any more of their articles or go to their website with the ridiculous "dangerous stocks" label.
On Apr 04 10:44 AM jstratt wrote:
> I will look at the authors logic but before looking at it I have
> to disagree that IBM is a dangerous stock. Reading the latest analyst
> reports and being a long term holder I find significant upside to
> IBM.
>
> Some things I like about IBM include
> 1) Software and services steady recurring revenues
> 2) strong financial position
> 3) large generation of free cash flow
> 4) High Return on Equity
> 5) IBM has weathered the worst of this downturn and continued to
> grow earnings.
>
> On the other hand it isnt hard to believe that Caterpillar and Marriott
> can have some hard shareholder times.
>
> I read SA because articles like this challenge my beliefs and forces
> me to consider other perspectives. thanks!
On Apr 04 11:36 AM bradiop wrote:
> I concur, the analysis is far short of being very deep. Would one
> look at Debt for company such as GM and equate it the same as to
> railroads or others with good cash flow. I own EPD and as other have
> mentioned when you have a solid business, nearly guaranteed cash
> flow with growth opportunities I would suggest not all Debt looks
> the same,
Today we have the Organized Crime, Organized Religion, Organized Labor Movement, etc. So the GEMCO that you described would be no stranger to me as a candidate category to the above.
BTW, the grapevine I heard, IBM has a museum of mothballed computers that houses the most ingenious and innovative of their prototypes. How long could you continue to keeping the customer stupid?
Teutonic
On Apr 04 11:09 AM Buckoux wrote:
> Teutonic Knight: " Some say that some of these companies gear more
> to serving its own executives - a food for thought in the current
> economic environment."
>
> This phenomenon has been so since before General Merchandising Corporation,
> "GEMCO", sold its business guts to protect its senior management
> (in the end they were fired by a new board). Though I am sure GEMCO
> was not the first company to be sacrificed on the alter of hired
> managements perfidy and duplicity, it certainly won't be won't be
> the last.
Our real-time track record for our 4 portfolios can be found on our website.
All our portfolios have beaten the broad market by a wide margin in real-time since mid-2006 (which is when we started tracking performance for the website).
Since mid-2006,
Our Small Cap Program is up +5.93%, the S&P 600 Total Return Index has lost -34.31%.
Our Mid Cap Program is down -22.32% while the S&P 400 Total Return Index is down -29.11%.
Our Large Cap Program is down -23.18% vs. -30.13% for the S&P 500 Total Return Index.
Our All-Cap Program is down -14% while the S&P 1500 Total Return Index is off -30.23%
Our services are 100% free. We collect advertising dollars from our sponsors.
On Apr 04 12:21 PM billd10 wrote:
> I'd be curious to know what sort of track record the "super stock
> screener team" has and how they make money. As in all things, it
> pays to follow the money. We are subjected to so much advice to buy
> this and sell that, based on the opinions of people who, unlike Warren
> Buffett, have no proven track record--only access to the media. The
> question to me is: how good is that advice, especially when so many
> of these people disagree. I think all these opinions should be taken
> with a grain of salt.
On Apr 05 12:19 AM raytayzmd wrote:
> ...well, I feel that with big cap stocks such as those in the list,
> everyone that matters already knows the risks and have acted or are
> acting upon them...hence, the risks are already mostly factored into
> the price...since I have no insight into how the institutions think,
> I stick with technical analysis for the big and mid-cap companies
> and just try to thumb rides for short term trades...I apply fundamentals
> to smaller companies with relatively little broker coverage and institutional
> interest where I look to hold long term.
Stick to screening regular old C corps. Your analysis is flawed on the MLP sector.
Yeah, let's look at EPD vs. the S&P.
finance.yahoo.com/q/bc...=^GSPC
Looks like it has outperformed by about 140%. Oh, that's without distributions. Compound those in and you get 200% outperformance.
You want to short EPD? Go ahead, make my day.
Super Stock Screener, please short EPD. Please....... Put your money where your mouth is. While you are at it, please short the other MLPs as well. They all have "bad" debt/equity ratios as well.
I bet after reading their SSS's track record Charlie Munger jumps ship!
First, as far as I can tell, your site has been in existence since 2007. Whose portfolio are you using And when was it actually created?
Second, overall performance means very little to me. If you held on to everything without portfolio adjustments, I wouldn't heed your guidance in the first place. If you did make changes, did you fit them into your models as if they existed from mid-2006?
Thirdly, How did the Portfolios fare in 2007 and 2008 alone? You know, during a Bull and Bear Market separately?
Your time frame leaves a lot to be desired, but a breakdown would give an inkling of performance during good and bad periods.
Just an opinion.
People might actually pay attention to your supersecret methodology if you would talk about the other factors you consider in making an investment recommendation.
Until then, as far as I can tell, you're pitching the next Madoff fund or get rich quick scam.
There are a lot of new SA members, probably scared here because of Mutual Fund or 401K losses.
There are also a lot of "New" authors whose Article Titles try to attract the "Scared".
More Due Diligence should be spent on the Authors than on the stocks they try to promote.
One does not want to compound one's misery by losing money on the "Advice" as well.
But it's not just us small fry that get caught ignoring the amount of debt a company has. Look at Apollo or Cerberus. The big boys get nailed, too.
Look for Damian Saunders' blog (damiansaunders.net) and you can get a feel of how the employees feel. HP will stumble when the economy picks when its best employees start a bee line to other companies.
HP will become a shell devoid of talents in the upcoming future just when it needs its staff to give it the pull in the next bull run....
This is only one area of investment research that a reasonable person would use. It appears to me that the author isn't saying that the only metric to use in your analysis is the debt/equity ratio, but it should be considered along with whatever other metrics matter to you--rate of new product development, free cash flow generation, competitive position, condition of the industry the company operates in--and base your investment decisions on your own research.
At the crux is what asset, and business model, is underlying the debt (not just the interest expense, but also the principle). If it is relatively stable and safe free cash flow, then your filter and analysis are misguided.
It is interesting that there are no REITs on you list. These Cos have the worst kind of leverage. Their cash flow may cover interest expense, but they count on rolling over massive amounts of debt ever few years on the back of illiquid assets that, during times of economic downturn, are decreasing in value.
I question your analysis on the basis that not one of these Cos appears to have landed on your danger list.
Good luck to all.
Based on the author's two responses in the comment stream coupled with the choice of wording within the article, this seems like a shameless advertisement for the author's website and I'm not sure why Seeking Alpha has published it.
If I were to guess the reasons it would be: IBM - write-downs or reduced revenues as companies halt capital projects to save cash-flow, CAT - decreased demand for vehicles as per the rest of the industry, Marriott - write-downs on property.
On Apr 03 10:09 AM bindlepete wrote:
> This is a pretty silly analysis in one regard. True, leverage can
> work against you in hard times but when interest rates are well below
> the inflation rates it could well be a time to borrow as it is essentially
> "free" money. Pay it back with peanuts.
>
> Now if you are in a regulated or solid business situation such as
> a utility or Rail Road (these rail roads folks are on the uptick
> due to the spiking energy costs of trucking and need for commodity
> exports coal grain etc) leverage at a less than zero cost makes a
> lot of sense. The utilities are guaranteed a profit if they are a
> regulated outfit so they will get their interest back no matter.
> ( This is not true for 3rd party producers.)
>
> The rail roads do have pricing control outside their contractual
> agreements and here, unless they are fools, they should have themselves
> covered for inflation.
>
> If you do not think we are in an inflationary environment google
> Shadowstats . what is going down other than housing ?
>
> Food no, Medical no, education no, labor no, energy no, enertainment
> no, clothing perhaps a trifle, rent no, taxes, no . The BLS is cooking
> the figures. Since Clinton they have been lying to us.
paul
Let's do a 5 second computer generated analysis and all get rich together!!!!!!!!!!!!!!...
I am certain those 10 companies can stand on their own records and I sure hope people are going to do their own home work before following the advise here.
Seeking Alpha is not a uniform entity behaving with hive-like intelligence. It is a website where independent writers publish articles on investing, economics, and finance. As such, to imply that all Seeking Alpha writers are expected to have the exact same opinion on all matters seems a bit absurd.
You can't expect someone to hold you by the hand and lead you to huge returns. However, by reading the perspectives of many different writers, you might be able to gain some insight into a particular stock or investment strategy.
On Apr 07 10:58 AM jamookey wrote:
> Anyone taking advice from ALPHA might as well follow Cramer.One week
> one of their bozos tell you oil will never recover,that they are
> the same as 90's .com stocks.the next week one tells you MLP'S are
> the way to go.the next day another ALPHA bozo tells you oil will
> never recover,stay awy from mlp's..These jackasses havn't a clue.I've
> beensaving their articles over the last six month and I have concluded
> they are just guessing or they are trying to swing sentiment in the
> direction that the author has a position for,long or short.Mostly
> it is bullshit and a waste of time.Take any advice you get from thses
> guys with alot of salt.
and to me, advice is cheap. Disclosure - - not short IBM YET but give me a few minutes....
I wished I read your comments first.
On Apr 04 11:01 AM Sanitychecker wrote:
> Let me guess you are short some or all of these stocks. Naked short?
> You may want to reevaluate that decision on some or all of them.
>
>
> You are right. Leverage can be a good or a bad thing. It must be
> investigated. So let's see what is under the covers of IBM during
> the period you show the most dramatic increase in their debt to equity
> ratios between 2007 and 2008.
>
> The ratio can change higher by debt rising or the equity position
> falling. Debt rising occurs from taking on more debt ( more troublesome
> might be exchanging higher coast debt for lower cost debt but we
> won't digress since that didn't happen). The dollar amount of stock
> holders equity can fall due to a fall in the price of stock or reducing
> the number outstanding shares.
>
> During 2008, IBM issued $13.8B new long term debt and retired $10B
> for a net increase of $3.8B in debt. That would increase their LT
> Debt to Equity ratio. They also repurchased $10.6B worth of equity.
> The result of both would decrease their debt to equity ratio so why
> did it increase? Oh. yea! The price of the stock must have dropped
> some during 2008. Between January 2nd and December 31st 2008, IBM
> stock fell over 18% (it actually had a 45% swing from high to low
> during the year) So. IBM is making positive moves in their capital
> structure but being penalized in the capital markets.
>
> Perhaps a better way to look at the possible consequences of a high
> debt to equity ratio is to look at how well IBM can afford the level
> of debt it has taken on. Let's see. Between 2007 and 2008 , IBM's
> Gross Income has risen from $41.3B to $45.34B, EBIT increased 18%
> from $15.1B to 17.4B, Net Cash Flow from operations increased 17%
> from $16B to $18.8B, Capital surplus increased from $34.8B to $38.8B
> and Retained earnings grew from $60.7B to $70.35B. And most important,
> their interest coverage ratio is 25.8 times. It doesn't seem to be
> an issue for IBM to pay it's Long Term Debt obligations, nor does
> it seem that their Income Statement, Balance Sheet, Capital Structure
> or Cash Flow would give ANY bank or lender pause.
>
> I wouldn't be surprised to see you didn't do your homework on any
> of the other stocks as well. I suggest you find a different advertisement
> of the advice you have to offer from your web site........... (In
> full disclosure, I own COP, IBM and ETP(closely related to EPD),
> all for different reasons but for reasons based on research and analysis
> of fundamental and technical reasons. That is the bottoms up part.)
On Apr 05 03:41 PM Jeff Skilling wrote:
> Gee, if only Warren Buffett had used the Super Stock Screener system
> he could've avoided his investments in BNI and COP.
>
> I bet after reading their SSS's track record Charlie Munger jumps
> ship!
Thanks.
On Apr 04 11:01 AM Sanitychecker wrote:
> full disclosure, I own COP, IBM and ETP(closely related to EPD),
>
So yes, please sell as much CME as you like. I'll buy it.