ATLANTA, GA (September 7, 1999) -- This past week we saw some pretty bad news about Sears (NYSE: S). It seems that the company is failing to compete effectively in a changing market. Instead of buying appliances at Sears, many people go to "category killers" like Best Buy (NYSE: BBY), or they're buying tools at stores like Home Depot (NYSE: HD). It's pretty obvious that the company is going through a rough time as it tries to change.

A company goes through a lifecycle not unlike a person. Like a baby, it needs heavy outside support when it is "born" through the funds brought in during an IPO and an issuance of bonds. In time it begins to mature and operate on its own, with less and less outside help. Ultimately, it no longer needs to be "parented" by issuing public offerings or bonds. It stands on its own two feet, but is still growing like a young adult. Eventually it reaches middle age, with a maturing business and constant and predictable income (ideally). Ultimately, many companies reach old age, and become feeble and unable to keep up with the times. Unlike a human, such a company can often turn around and reinvent itself -- witness IBM (NYSE: IBM). However, many times the company just fades into oblivion like Howard Johnson's and Woolworth's.

Sometimes companies never make it to adulthood, maybe due to mistakes of management, or a changing market in which it can't adapt. For example, I can think of Commodore Computers, which used to be one of the largest manufacturers of PCs. Commodore lost its market share and ultimately went bankrupt. However, somebody was buying its stock up until the end even though it went down to the penny stock range. I often wonder who buys stock in companies that are going bankrupt? Is it speculators hoping that the company will turn around? Is it short-sellers covering earlier short sales? Day-traders betting on incremental gain as short-sellers cover? Short sellers selling short on incremental gains from day-traders? It really can make your head spin, can't it?

Something about companies that are sliding downhill fascinates me, perhaps because I've actually worked for a couple of them. The process is always the same: the market has changed and the company is not prepared. Profits drop, and then the company starts losing money. What makes things worse is the better people see the trouble and jump ship early. This leaves the mediocre performers and the ones that are too close to retirement to quit. There is also the unfortunate group that has jobs they can't easily take to another company, or perhaps the entire industry is suffering (like steel in the early 1980s). Staff cuts occur, and if they're done through early retirement and voluntary separation, more good people race to the door.

What does it take to turn a company around? Serious pain for all involved. It takes somebody to come into the company who isn't afraid to close down money losing divisions, fire incompetent (and many competent) people that have been with the company for years, and reorganize the company to operate efficiently. None of this is easy. The divisions that need to be shut down may be the old mainstays of the business, and make up a good part of the company. To any conscientious person, firing, laying off, or "downsizing" is very difficult -- you are taking away people's livelihoods. How do you work out a reorganization that is efficient, and do it fast so it doesn't further demoralize the staff? On that note, how do you shut down divisions and downsize without demoralizing the employees, further adding to the exodus of competent people -- or destroying the productivity of those left?

Watching the stock market, you can see many companies going through the motion of turning around. They slash divisions, cut staff to the bone, and reshuffle management. It makes the stock price jump temporarily, but no real changes were made. The company still goes downhill, maybe even faster. Some people make out in the stock price jump (mainly the executives -- the ones who canned everyone -- when they exercise their options), but the company continues to slide into the ground.

In conclusion, I believe it is often a sucker's bet to buy stock in a company that is a possible but thin "turnaround" prospect. Let the other guys take that risk. Instead of buying a Drip in a company like Sears and hoping for a major miracle, why not go with a Drip in one of the companies that is burying it in the marketplace? Home Depot and Wal-Mart are two. There are enough people that have to agonize over a company when it is going downhill -- let's not add ourselves by buying stock in it.

To discuss this column, please visit the Drip Companies board linked in the top right of this page.