We all know that if Greece were a stock without risk of systematic failure, it would be part of financial history. So what stocks portray some of the same characteristics (unsustainable spending, high leverage and debt maturing soon)?
In order to find this out, I did a stock screen by looking at the 14,000 listed equities in the US, and then cut it down to three.
My screening criteria looked like this;
- Debt/Equity over 100%
- Average maturity of debt within three years
- EPS growth less than capital expenditure growth
In other words, we are looking for a company which has taken on a substantial amount of debt, is coming due in the short to medium term, and has higher capital spending than earnings growth.
The three companies that remained were:
- Biosante Pharma (BPAX)
- Human Genome Sci (HGSI)
- Providence Services (PRSC)
Two of these are biotechnology firms with a large research pipeline, liable and unpredictable to surprise both to the upside and to the downside.
However, Providence Services Corporation provides privatized social services to individuals and families. The company’s services are reimbursed by government programs such as welfare, juvenile justice, Medicaid, or corrections. The company has so far returned a negative 29% on a one year total return basis. It has a debt equity ratio of 1.6; average maturity of debt is in May, 2014 while capital expenditures have increased 174% versus five year EPS growth of 9%.
For those taking a more generic viewpoint, the company is all reliant on the government for reimbursements. This is even more significant than just having a single customer account for all sales as the government dictates terms like no other corporation. And with haggling on Capital Hill about budget concerns and government spending, the stock specific risk is too great to hold – and perhaps too great not to short.