A financial crisis like this one may hurt right now, but it comes with a couple of positive sides:
Since I'm a heartless opportunist, I cherish the thought of bad businesses going bankrupt. It means that the capitalist system is working. The survivors have less competition, and the corpses are great reminders of what not to do in the future. In short, what doesn't kill you will make you stronger. That goes for you, for your portfolio, and for the companies in it.
The deathwatch list
Going back to recent instances of this morbid hobby, I'm happy to report that every company on deathwatch so far has managed to survive another couple of months. But how long can they last? Let's check in on a few of our old friends:
| |
1-Year Trailing Sales Growth
|
Debt/
Capital
|
Earnings From Continuing Operations Margin
|
1-Year Return
|
|
|
Pier 1 Imports (NYSE: PIR)
|
(13%)
|
56%
|
(9.8%)
|
(88%)
|
|
|
KB Home (NYSE: KBH)
|
(53%)
|
70%
|
(32.2%)
|
(48%)
|
|
|
Dillard's (NYSE: DDS)
|
(5%)
|
35%
|
(3.5%)
|
(66%)
|
|
|
Rite Aid (NYSE: RAD)
|
20%
|
85%
|
(6.0%)
|
(86%)
|
|
Data from Capital IQ, a division of Standard & Poor's.
You may ask why I'm picking on these companies over their rivals, who all stand on the same wobbly economic ground. Well, KB Home is certainly not the only sick homebuilder that may not survive until the real estate market crawls back from the brink of fiery death. If KB is up to its shoulders in debt, then Standard Pacific (NYSE: SPF) is struggling to keep its nostrils afloat, as 80% of its total capital comes from various loans. But no other builder can quite match KB's unique blend of heavy debt, massive losses, and sales crashing through the basement floor.
The fact that Pier 1 has outlived both Circuit City and Linens 'N Things is a bigger shock to my system than watching the Devil Rays go from league-worst to the World Series in one year. Maybe that's just because I don't care for baseball, but still, Pier 1 should have gone out of business years ago.
Repeated attempts to breathe new life into sagging operations have met with very little success. The sales slump has accelerated every year since fiscal 2004, which was also the last time Pier 1 saw positive cash flows or earnings. Why buy rattan chairs from Pier 1 when Target (NYSE: TGT) or Wal-Mart (Nasdaq: WMT) can sell you a much more modern equivalent for less money? The average consumer is neither stupid nor stuck in the style of 1975.
The bottom line
When businesses do fold, it makes their competitors stronger and clears the way for new growth. Death is part of the cycle of life. I'd be very surprised if any of these wobbly structures are still standing in 2010 -- and frankly, I wonder why some of them are even breathing today. Get out of these dying stocks while you still can.
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