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Is Your Investment Safe?

|Includes: American Airlines Group (AAL), AROC, BA, BSX, C, GE, GM, HPE, KO, KODK, MGM, NAV, S, SHLDQ, TXU, V
Summary

The stock of any publicly traded company by definition is risky.

Lack of debt, tangible assets which exceed liabilities, solid cash flows, etc. can make some stocks less risky than others.

Iconic name brands, mega-cap status, or multiple decades of existence however does not make a company safe.

Iconic - devotion to or of the nature of a venerated greek statue, or holy figure.

You periodically see investors call this company or that iconic.  In almost every case, they refer to some multi-billion dollar mega cap which spends tens of millions each year on advertising.  This advertising forms a brand which leads investors to in turn think the company less risky.  But maybe that is a mistake?  Maybe those tens of millions spent on advertising, in addition to selling goods, is an expense which tends to lure investors into a false sense of security?  In my opinion, companies no matter how large, no matter how many decades they have been around, no matter how many billions have been spent on marketing over the years so you know their name, are not iconic.  They are not worthy of devotion, holy, or to be venerated.  They are not even "safe".  Here's a list of formerly "iconic" companies which have lost investors Billions, with a B.  It took me less than 10 minutes to put it together.

  • GE
  • GM
  • Bethlehem Steel
  • Citigroup (C)
  • Sears (SHLD)
  • HP (HPE)
  • Energy Future Holdings (formerly TXU)
  • Computer Sciences
  • Sprint Nextel (S)
  • Boston Scientific (BSX)
  • Navistar (NAV)
  • American Airlines (AAL)
  • MGM Resorts 
  • Kodak (KODK)
  • Enron 
  • Lehman Brothers
  • U.S. Leather
  • Pacific Steamship Company

I realize you don't even know the name of the last two, but I included them because that is kind of the point. They were once stalwarts of the Dow. Everybody knew there name, knew they were safe. Now they don't even exist, and haven't for decades.  Similarly, just because these companies still have stock symbols, don't think they didn't go bankrupt in between, losing investors billions in the process.  Most did in fact become and stay $0's for their investors.  They just got resurrected in a new form due to the valuable name and assets.  The common stock investors were still wiped out.

I don't mean to pick on anyone or even the word iconic. Rather my point is people have the mistaken impression that large and mega cap equates to meaningfully less risk.  Mega caps do tend to have professionals at the helm, multiple brands with value intrinsic to those brand names, greater access to resources, etc. but once you also include greater liabilities and price and multiples into your risk equation, they are typically anything but less risky. Ask yourself, is GE at 41x EV/EBITDA and negative tangible book value really less risky than Archrock (NYSE:AROC) at 8x EV/EBITDA? (both are currently enjoying significant demand for natural gas compressors).

The answer seems obvious to me, but most investors "trust", "have faith" or "feel more comfortable with" GE rather than Archrock because billions have been spent on GE advertising over the years so everyone knows the name.  Today, you may think GE the exception.  You may focus on it as a bad stock simply because it has been going down a lot lately.  That however is why I chose it.  If I had said Coca Cola (KO), Boeing (BA), or Visa (V) you would have dismissed me.  Just like you would have if I had used GE, GM, HP, Kodak, or Sears as the example in the past. 

Your mega-cap is not iconic.  No company trading above a 15x EV/EBITDA is safe.  

Cash Flow Kingdom focuses on small cap stocks because that is where individual research pays off.  It is where we can find value that isn't already priced into the stock.  

We pay special attention to strong company cash flows because we think they help reduce risk, and in the case of small caps can also sometimes be a source of value which isn't already priced in.

Disclosure: I am/we are long AROC.

Additional disclosure: I am also probably long some of these other large cap names through an fund or ETF I own. This article discusses risky investments. I do not know your goals, risk tolerance, or particular situation; therefore, I cannot recommend any investment to you. Please do your own additional due diligence.