Run From These Stocks!

Given the market's current volatility and macroeconomic uncertainty, investors would do well to remove extremely risky stocks from their portfolios.

A recent lineup compiled by Forbes, ominously entitled "The Risk List," offered 50 particularly perilous stocks. Investors in any of the five retailers who made the cut should probably take a second look at their own portfolios.

Run away!
Forbes consigned Zale (NYSE: ZLC  ) , Rite-Aid (NYSE: RAD  ) , Borders Group (NYSE: BGP  ) , Great Atlantic & Pacific Tea (NYSE: GAP  ) , and Bon-Ton (Nasdaq: BONT  ) to the ranks of their risky roster.

One of the metrics Forbes weighed was Audit Integrity's "Accounting and Governance Ranking," which takes into account "the transparency and statistical reliability of a corporation's financial reporting and governance practices." The firms identified as "Very Aggressive" or "Aggressive" according to this metric are more prone to financial restatements, class action lawsuits, and sagging stock prices. Bon-Ton, Great Atlantic, and Borders each received an average rating on this metric, while Zale and Rite-Aid were marked very aggressive and aggressive, respectively.

Beyond Forbes' criteria, however, all five of these stocks boast plenty of ominous reasons for buyers to beware:

  • Zale staggers beneath a 91.7% debt-to-equity ratio, and sports a quick ratio of 0.1. 
  • Rite-Aid hasn't reported an annual profit since the fiscal year that ended in March 2007. 
  • Borders' problems are well known, including high levels of indebtedness and a cutthroat competitive environment, enhanced by disruption from e-books. 
  • In its fiscal year ended February, Great Atlantic & Pacific Tea reported an absolutely staggering $16.59-per share loss, and it has negative shareholders' equity. 
  • And when it comes to scary debt-to-equity ratios, Bon-Ton takes the cake at a mind-boggling 885.6%.

Two for thought
It shouldn't be hard to find safer retailers than this questionable bunch. Let's examine a pair of better bets in the sector:

Company

Earnings Per Share (TTM)

Revenue Increase/Decrease (TTM)

Debt-to-Equity Ratio

Cash per share

Aeropostale (NYSE: ARO  )

$2.45

16.8%

N/A

$3.34

Costco (Nasdaq: COST  )

$2.80

5.6%

20.6%

$12.00

*Data from Capital IQ and Yahoo! Finance.

Both companies are solidly profitable, with increasing revenue. They both have cash on the balance sheet, and their debt is either nonexistent or (in Costco's case) very manageable. Aeropostale is a teen retailer that has done very well, despite the recessionary tailwinds that impeded many specialty retailers' operations. Costco provides appealing discount prices on high-quality goods, a strategy that can succeed in good times and bad.

Avoid the risk, reap the reward
In these risky times, defensive investors should look for stocks that don't fly risky red flags. Some stocks that look "cheap" on the surface could suffer from serious and threatening issues. If the economy heads south again, they could get wiped off the map. And while high debt and low profits are signs of danger today, the kind of poor corporate governance plaguing many companies on Forbes list can often presage serious risk in the future.

Would you invest in these rickety retail stocks? What are your favorite retail stock investment ideas? Join our conversation about risk and reward in retail, and share your thoughts in the comment box below.

Costco is a Motley Fool Inside Value recommendation and a Stock Advisor pick. The Fool owns shares of Costco. Try any of our Foolish newsletters free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.


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  • Report this Comment On July 13, 2010, at 5:14 PM, vipyr wrote:

    I did not run from ZLC, I ran to ZLC and its been in a nice fat uptrend for about 5 days now. The chart showed that it was oversold at the bottom, and it has made a great recovery.

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