Investors are optimists. When people invest money it's because they believe that the underlying business will expand, leading them to a profit.
However, some investments don't work. And some companies will never expand operations. Over time, these laggards may abandon their business strategy and seek bankruptcy protection. Though bankruptcies typically happen to small companies, large ones can fold too. In fact, Eastman Kodak and Patriot Coal were two large companies that filed for bankruptcy in 2012.
When a company files for Chapter 11, investors are wiped out. The stock plummets.
Hundreds of small companies are likely to cease operating in 2013. However, I've uncovered three large ones that could disappear sometime next year ...
One is a retailer that's been in business since 1982. But the sun is setting on this trendy clothier. The second company is a household name. In fact, one or more of its enhancement products have no doubt been in your home at some point. The third company was a pioneer in electronics. However, its business model couldn't keep up with the times and shareholders will ultimately pay the price.
Good companies operate in growing industries. The three companies listed below operate in either a dying or ultra-competitive industry. Good businesses increase sales, resulting in positive earnings. Though two of the businesses below produce positive earnings, they're decreasing at a faster rate than revenue.
A balance sheet isn't important to many good businesses. However, when times are tough and income stops growing, paying off a huge debt balance is a major hurdle.
I evaluated each of these three companies based on their industry, their income statements and their balance sheets. Each of these companies is weak and getting weaker based on those three metrics.
Here are three stocks that may not last through 2013:
Pacific Sunwear of California (NASDAQ: PSUN) is in disarray.
Retail is a notoriously tough business and it takes a strong product and brand to survive. Long ago, Pacific Sunwear had both. Its California style and Newport Beach following made it a favorite among locals and consumers across the country.
However, sales have been in a constant decline after peaking in 2007. Not only did sales peak more than five years ago, the company hasn't been able to make a profit since 2007. In fact, losses slowly increased each year since 2010.
The losses are that much worse because PSUN has a $75 million debt balance and rising costs.
The combination of declining sales and five years of negative earnings may put this company to bed in 2013. PSUN is unlikely to survive for more than 12 months.
Avon Products (NYSE: AVP) isn't looking too pretty anymore.
Unlike Pacific, Avon actually has positive earnings. However, sales growth is pathetic and net earnings are dropping. A meager growth to sales ratio and the contraction of income are signs of poor management, which is why AVP is unlikely to survive 2013.
Former CEO Andrea Jung was finally ousted last year. But the damage is too great for the company to recover from, primarily because new CEO Sherilyn McCoy has limited experience running a major company.
Avon carries more than $3.5 billion in debt. That's about a third of its market capitalization.
The first sign that AVP is in trouble will be a dividend cut. Once that happens, expect a bankruptcy announcement to follow.
Best Buy (NYSE: BBY) is done.
Its survival will depend on this holiday season. If the company can muster enough sales after Thanksgiving (which I doubt), then it may last more than another year.
However, the dominance of online retail has eliminated the need for BBY to exist. Moreover, consumer spending is already weak, making now a difficult time for any store operator, much less a brick-and-mortar dinosaur like BBY, to make headway.
Sales growth has been virtually non-existent over the past three years and earnings have constantly sunk lower. A $2.1 billion debt balance doesn't help its long-term prospects either.
These three companies must stage a successful turnaround soon. A few more quarters of decreasing earnings may spell the end for one or more of the above stocks … likely within the next 12 months.