Sprint Nextel Corporation (S) is a major wireless communications provider, however, profits have been elusive for this company. The recent losses have not stopped Sprint CEO Dan Hesse from buying 50,000 shares recently. This transaction was valued at about $119,000, which is a considerable amount of money for most people, but possibly just a token gesture for some CEOs.
The stock jumped when this news was released, and it looks like a good opportunity for investors to sell this stock on the rally. Many investors are attracted to low-priced stocks, but often times it can be for the wrong reasons. When stocks have high debt loads, significant competition, and continued losses, it often pays to avoid the shares or sell on the rallies. Here are a few reasons why investors should consider selling Sprint shares on this recent rally:
1. The CEO of Sprint, Dan Hesse, reportedly earned about $12 million in 2011. That is equivalent to about $1 million per month or about $33,000 per day. Because of this, investors who bid up Sprint shares on the news of his $119,000 stock buy should reconsider. After all, that transaction is equivalent to around 3 days worth of pay for the CEO. That's not exactly a major commitment, and the stock still shot up about 5% on the news of his buy. In the coming days, investors could send the stock right back to where it was trading before this "big" news was reported.
2. Sprint has a highly leveraged balance sheet and this is increasing the risk for investors. According to Yahoo! Finance, Sprint has about $7.57 billion in cash and $22.27 billion in debt. That's an enormous debt load for investors to consider and it is causing some analysts to cite a potential concern for the future risk of bankruptcy. Sprint reportedly will need to pay back about $2.6 billion in debt around 2015, and the company needs to invest much more to compete with rivals like AT&T (T) and Verizon (VZ).
3. The recent CEO buy of Sprint shares does little to change the fundamentals of this company. A debt-heavy balance sheet is risky when a company is reporting some profits, but when you combine high debt loads with losses, it is often a recipe for an underperforming stock, or even major losses.
With the balance sheet carrying high levels of debt and with analysts expecting the company to report continued losses for the foreseeable future, investors should consider selling the stock on the current and any future rallies. The stock has been in a downtrend, and that could continue. Sprint could be hitting new lows at the end of 2012, as investors sell for tax loss purposes.
Key Data Points For Sprint From Yahoo Finance:
Current Share Price: $2.48
52-Week Range: $2.10 to $6.45
2012 Earnings Estimate: a loss of $1.54 per share
2013 Earnings Estimate: a loss of $1.03 per share
P/E Ratio: n/a due to loss estimates
AT&T shares appear to offer solid value for dividend investors, as it has a yield of over 5%. This company is very profitable and worth considering as an alternative to Sprint, especially on any pullbacks. AT&T carries the popular iPhone and many other products that provide this company with solid revenues. In sharp contrast to Sprint, this stock is in an uptrend and has recently been making new 52-week highs. That trend is likely to continue in 2012.
Key Data Points For AT&T From Yahoo Finance:
Current Share Price: $32.91
52-Week Range: $27.29 to $32.75
Dividend: $1.76 per share which yields 5.4%
2012 Earnings Estimate: $2.39 per share
2013 Earnings Estimate: $2.56 per share
P/E Ratio: about 14 times earnings
Data is sourced from Yahoo Finance.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.