It's often been said that the two happiest days in a boat owner's life are the day that he buys his dream boat, and the day when he is finally able to sell it.
When I was growing up in the Pacific Northwest, our family shared a 34 foot Tollycraft powerboat with another family in our neighborhood. I have very fond memories of bouncing along the white caps, smelling the salt, and feeling the wind on my face. My father remembers hitting a submerged log, having to constantly repair the engine, and fighting the never-ending corrosive effects of salt water.
He always had a sense of humor about it, though. He had a wooden plaque mounted in the cabin that read: "Boat: [boht] noun, definition: A hole in the water, surrounded by wood, into which one pours money."
I've often thought of that definition when I look at businesses like Martha Stewart Living Omnimedia (MSO), Rite Aid (RAD), Goodyear Tire (GT), Great Wolf Resorts (WOLF), Pacific Ethanol (PEIX), and any other number of what you might call "boat stocks," "black-hole stocks" or "sinkhole stocks." These companies are high-precision machines that have perfected the art of turning $1.00 into $0.90 or less. This is more difficult to do than one might expect. Even in the 1985 film Brewster's Millions, Richard Pryor is unable to burn through $30 million without realizing a positive return.
What MSO, RAD, GT, WOLF, and PEIX all have in common is that they have all generated negative free cash flow for many, many years: 10 years for MSO, RAD, GT, and 7 years for WOLF and PEIX. The last 7-10 years have seen huge booms and busts, but averaged over the complete economic cycle, these companies have been cash sinkholes.
If you have a business that is hemorrhaging cash, where do you turn? To the capital markets, of course. All five companies listed above have done a good job of diluting their shareholders by issuing more shares, and leveraging up unprofitable businesses by issuing more debt.
But, you may ask, isn't Goodyear a pretty shareholder-friendly company? After all, it has paid out $468 million in dividends over the last 10 years. Unfortunately, this cash was not created by actual business operations. The business itself was a furnace that managed to incinerate $268 million. The cash to pay dividends came rather from issuing $985 million in new debt and $987 million in new stock.
Miracles happen every day. Great Wolf Resorts is trying to license its brand and move away from its highly capital-intensive business model. Rite Aid may be able to reinvigorate its stores with its new "loyalty + wellness" program. J.C. Penney (JCP) recently acquired a 16.6% stake in Martha Stewart Living Omnimedia, and may eventually buy the entire company.
If you own a sinkhole, there are two ways out: Either the sinkhole miraculously reverses itself and becomes a cash geyser, or a greater fool takes the property off your hands. After all, God's not making any more sinkholes, is he?
As for me, I'd dump the sinkhole and buy a boat. At least that way I'll get to enjoy the crisp, salty air.