Call me crazy, but a stock that's climbed about 35% in one week just doesn't make sense to me. Even more mind-boggling is when it happens to a company like Talbots (NYSE: TLB ) -- which is in the midst of a major turnaround and holding on for dear life.
I know it's kind of mean to imply that some investors out there got their drinks spiked (a move the Justice Department says Broadcom's (Nasdaq: BRCM ) CEO was allegedly fond of). But I'm sorry, 35%! That's what I call crazy.
Talbots' "good news" this week was that its majority shareholder, Japan's Aeon Co., agreed to give the retailer a $50 million credit facility for its turnaround initiatives this year, and that will bring its borrowing capacity to $215 million.
I can see why that's positive, especially since, earlier this year, investors freaked when it came to light that HSBC and Bank of America (NYSE: BAC ) had pulled $265 million letters of credit from Talbots. In this day and age, any hint that liquidity could dry up is a serious risk, especially for turnaround companies that need access to capital to not only get growth back on track, but merely run business as usual.
But is this news worthy of a 35% pop? I don't think so. Although Talbots was able to reconfirm its earnings outlook for this year, let's not forget that like some of its retail niche peers -- Chico's (NYSE: CHS ) and Coldwater Creek (Nasdaq: CWTR ) , for instance -- it still needs to attract fickle customers during tough economic times, and I've often contended that the mature women these retailers target are going to be among the toughest to woo in an economic downturn.
Last but not least, Talbots may have access to additional credit, but let's not forget it still has $541.6 million in debt already. And judging by the fact that this company has negative operating income, it can't cover its interest on its existing debt from operations alone. Ouch. Here's another element that might bake your noodle: Compare the amount of debt Talbots already has to its $622 million market cap, and its negligible $31.8 million in cash. And who does this make sense to, again?
Some sources out there say Talbots' huge increase this week may be related to a short squeeze, but still, even a small increase would seem too euphoric to me at this point in the game. Talbots still has a long way to go to prove it can get itself back on track, and its debtor's ways just don't attract me as an investor.
Stock up on some related Foolishness:
- Talbots was one of the stocks I thought investors should steer clear of in April.
- That's because it was still tricky.
- Of course, Talbots had another stretch where it took off in March.