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5 Companies That Haven't Earned Their Keep

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In order to become a successful investor, it takes a love for finance, quite a bit of discipline, and a long-term mind-set. Another important factor that most investors often overlook is a penchant for cutting your losses early before you let a bad investment spiral out of control.

Today, I take a look at five companies that have taken investors for a roller-coaster ride filled with mounting losses. By focusing on these five companies' accumulated deficit -- which is the amount of net loss that is attained in a given quarter or year (be it through losses or writedowns) and added cumulatively to previous years' net earnings or losses -- you'll be able to get a better idea of why I feel they have no chance of ever earning their keep with shareholders.

Sprint Nextel (NYSE: S  )
It's a good thing that SoftBank agreed to become a majority stakeholder in Sprint Nextel, because the way the company was racking up losses was putting it on a course for irrelevance or perhaps even something worse.

As of the first quarter, Sprint Nextel had an accumulated deficit of an astonishing $45.5 billion. This service provider has fallen way behind its peers Verizon and AT&T in terms of rolling out a next-generation 4G LTE network. Even more disturbing, it sold more than 5 million smartphones during the quarter, delivered its highest wireless service revenue, and also its highest average revenue per user in its history, and still lost money! As I see it, Sprint's days of being relevant are long gone.

Cell Therapeutics (NASDAQ: CTIC  )
Certainly no discussion of companies with large accumulated deficits would be complete without discussing a biotechnology company. It's perfectly understandable to see a biotech, especially a clinical-stage one, run with an accumulated deficit, as it takes time and money to build up a drug pipeline. However, after multiple complete response letters (the equivalent of a rejection) by the Food and Drug Administration and years without an approved drug, Cell Therapeutics racked up an astounding $1.83 billion in accumulated deficits through the end of fiscal 2012. By comparison, that's nearly 56 times larger than its shareholder equity. 

I have personally lost track of how many times this company has diluted shareholders with a secondary offering to stay afloat, but with the share price currently at $1.22 now and a reverse-split-adjusted $14,510 a share one decade ago, that should give you some idea of the danger of buying companies that let their losses grow unabated. Cell Therapeutics does, finally, have an approved drug in the EU known as Pixuvri to treat multiple relapsed or refractory aggressive non-Hodgkin B-cell lymphoma, but that'll hardly make a dent and, in my opinion, certainly won't get the company to profitability by itself.

Clearwire (UNKNOWN: CLWR.DL  )
Trust me, there is no irony lost on me in the fact that Sprint Nextel, which boasts an accumulated deficit that's twice as high as its market value, is currently in a bidding war with DISH Network to purchase 4G wireless broadband specialist Clearwire, which has itself amassed an accumulated deficit of $2.57 billion as of the first quarter.

The big allure of Clearwire is its vast spectrum assets. Beyond these assets, I'm not sure there would be a viable reason that Clearwire is still in business. Between 2005 and 2012, Clearwire burned through $10.6 billion in free cash outflow, mostly to expand its now-archaic WiMax network. Even its WiMax partner, Sprint, which has kept Clearwire afloat on more than one occasion, didn't seek out Clearwire for its 4G LTE buildout. Instead, Sprint opted initially for LightSquared and only succumbed to Clearwire's charm after the Federal Communications Commission struck down the use of LightSquared's satellite network because of potential GPS interference. This is nothing more than a merger out of weakness for Clearwire.

Rite Aid (NYSE: RAD  )
If there weren't already plenty of reasons to dislike drugstore Rite Aid, allow me to add one more: an accumulated deficit of $7.77 billion as of the fourth quarter of fiscal 2013. To put it another way, Rite Aid's accumulated deficit is nearly three times its current market value.

Things have certainly improved on the bottom line for Rite Aid over the past two quarters, with the company surprising handily to the upside. However, it's been much of the same for the company with regard to same-store sales figures falling another 2% in the fourth quarter and generic drugs weighing down its pharmacy margins. High levels of debt continue to plague Rite Aid and quell any chances it's had to modernize its stores to make them more customer-friendly or aggressively advertise. Even with the addition of its loyalty rewards program, drugstore customers simply aren't that loyal. When the top year for operating margin over the past decade is 2.7%, you know it's likely time to move along.

Level 3 Communications (NYSE: LVLT  )
We're taught in school that two negatives, when multiplied, equal a positive. Unfortunately, combining two bad companies in real life only leaves you with one really bad company! Thus is the plight of Level 3 Communications, which in 2011 bought Global Crossing for $3 billion, merging two integrated telecommunication companies that haven't turned a profit. As of the first quarter, Level 3 had an accumulated deficit of $12.93 billion.

What's hampering Level 3's growth are many of the same problems that have plagued it for years. First, the company is toting around nearly $8 billion net debt for a worrisomely high net debt to last 12 months' adjusted-EBITDA ratio of 5.3! The interest payments alone on Level 3's $8.6 billion in debt make turning a profit even that more difficult. The company is also encountering demand slowness in Europe and the U.S., with both economies paring back spending.Level 3 hasn't come anywhere near turning a profit over the past decade and I'm not certain it ever will.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 12, 2013, at 11:55 AM, spokanimal wrote:

    Sprint's interest in Lightsquared was part of a multi-faceted process designed to drive Clearwire's stock down to a small fraction of it's net liquidating value. Sprint used many techniques over the past 3 years to minimize investor expectations for Clearwire.

    The whole reason behind sprint's efforts to manipulate Clearwire's stock to such low levels became evident last winter when Softbank bid $20 billion for 70% of sprint... but not before Softbank's prinicipal financier for the bid insisted that Sprint secure 51% of Clearwire's stock. The reason was because Softbank would only pay $20 billion for sprint if Sprint could deliver Clearwire's head on a platter as part of the deal, and deliver it cheaply...

    ... which was exactly what Sprint had spent 3 years preparing to do by driving Clearwire's stock into the sewer.

    Softbank, however, wasn't planning on Dish's Charlie Ergan out-bidding him for clearwire. In fact, Ergen's $4.40 offer for Clearwire even approaches almost one half of the value of Clearwire's assets, net of debt. That's why Sprint's CEO Dan Hesse went out of his mind a week ago complaining that Dish's bid for Clearwire was "illegal", and "non-actionable", or any other fiction that he could conjure up.

    The reason Hesse went off so half-cocked? Dish was ruining what he had spent 3 years doing, which was to screw Clearwire's minority shareholders and steal the company for pennies on the dollar.

    Even MORE of the reason for Hesse's anguish is that all that messing around with Lightsquared, attempts to ruin Clearwire's retail operations, and threats to minimize his wholesale business with clearwire ALSO cost Sprint valuable time in launching it's own LTE and network vision efforts. Hesse's efforts to ruin clearwire's stock price also cost Sprint valuable time in it's efforts to begin catching up with Verizon and AT&T.

    Just goes to show that sometimes, the most blatant attempts at corporate malfeasance against one's red-headed, step-subsidiary can result in screwing up your fiduciary duties to your own shareholders as well.


  • Report this Comment On June 12, 2013, at 11:57 AM, rphnow wrote:

    Would you help me understand how Generic drugs can weight down a pharmacy's margins. Have never seen or heard anyone ever claim this in my 25 plus years as a pharmacist. Also, Same store sales have fallen some, mostly due to people switching from Brand name drugs to Generic Drugs which cost less. RAD is on its way to continued success. Everyone should have some in there portfolio. You have missed the boat on this one.

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