Sprint Nextel Corporation (S) has seen a surge in price over the past three months, up 121% since May of this year. What's all the fuss about? I don't wish to rain on the parade, but this stock's value surge is primarily based on speculation. Investor sentiment was that Sprint's bankruptcy chances were basically a coin-toss earlier this year, as a result of Sprint signing a debt-inflicting deal with Apple (AAPL). Lucky for shareholders, Sprint executives didn't think that it was a bad idea, because it has been the driving force for lots of new subscribers. The problem is this: the stock still doesn't weigh up. Sprint is in debt up to their antennas, with over $10 billion in net debt and almost $38 billion in total debt. Now, although only $6.5 billion of that is current liabilities, Sprint hasn't made a net profit in over three years, so it's hard to say how they'll pay that back. Apparently, looking at their historical income statements would be the only way to figure out that this company has ever made a profit.
It is worth noting that the methods of value investing typically don't hold hard-and-fast to technology stocks, and Sprint Nextel can be viewed as a technology stock. So, what's worth taking from this analysis? That Sprint has a long way to go to earn its share back in the Telecom kingdom.
Now, I won't deny that the speculative side of me thinks that this is a great stock with fair potential in the near term. Surely most value investors admit that a trend can be more important in determining the future trend of a stock than its intrinsic value. But, the goal of value investing is to grow capital and limit risk. This stock is floating on speculation and, based on its tangible book value and earnings history, is worth nothing. Hence, be careful.
If I had to give it a rating and I had reasonably limited capital, I would say hold or sell. Given that I have extremely limited capital, I hardly want anything to do with it.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.