AMD Shouldn't Scare You

I take a lot of flak from my readers for owning and supporting Advanced Micro Devices (NYSE: AMD) despite a massive share price drop and heavy debt load. But the company is only a few quarters removed from its last round of consistent profits, and if new CEO Dirk Meyer can keep up his brilliant execution -- a big change from ex-CEO Hector Ruiz' multiple missteps -- then a new age of solid profits will dawn soon. And the stock also rises.

In the spirit (bad pun intended) of the upcoming Halloween season, let me show you some really scary stocks -- and a few beauties like AMD that only look like beasts at a first glance.

So what?
It's easy to find companies with blemishes on their financial statements. Some are really scary, and some are not:

Dollar values in millions. Data from Capital IQ, a division of Standard & Poor's.

Throw the book at 'em
Even a negative book value doesn't always spell disaster. Clorox took on a lot of debt in 2007 to buy back nearly $900 million of its own shares. That's about 10% of the company's market cap at the time. Clorox bottomed out at $637 million of negative book value, and has rebounded nicely from there.

Someone is still buying a lot of stock in American car makers, even though Ford's stock is down 42% over the last year and GM has lost 68% of its once so imposing market cap. The numbers only get worse if you look back a few more years, and the accumulated losses weigh heavily on their book values. For comparison, AMD's stock has suffered about as badly but the company still has $1.4 billion of positive book value.

Not Robert Altman of Short Cuts fame
With an Altman Z Score below 1.8, creditors could come knocking on a company's door any minute, asking for restitution. It's an early indicator of the kind of financial trouble that leads to bankruptcy, and is calculated from components like total assets, retained earnings, working capital, and trailing operating earnings.

From that perspective, AMD honestly does look pretty bad. The Z score has dropped from 3.5 two years ago to a meager 0.08 today, based on mounting losses, an expensive acquisition, and writedowns of the new asset's book value. But there are ways to survive an Altman score scare -- just look at Sirius, which has been living with a negative score since 2005, way before the XM acquisition.

Rating the scream factor
The truly scary stocks today are the ones that can't boast enough business prospects to make up for short-term financial problems. I'm looking at you, Ford and GM. You too, Sirius -- unless you have a rabbit hidden up your sleeves that will change the whole game very soon. And Hallmark Channel operator Cron Media Holdings (Nasdaq: CRWN) is the scariest stock I can find -- a $536 million micro-cap backed by a negative 3.8 Z score and negative $661 book value. That's right -- if privately held parent company Hallmark liquidated Crown today, the proceeds wouldn't even cover the accumulated losses. And then there's $700 million of net debt to pay off. Stay far, far away from this one, Fool.

Financial crises come in all shapes and sizes, and I'm happy to take the particular risks involved in owning AMD today. This exercise showed me that even a semiconductor stock (boo!) with a negative book value (hiss!) can also be an official Foolish newsletter recommendation with a five-star CAPS rating (yay!) -- like Stock Advisor pick Linear Technology. There's still hope for AMD to reach that level of sophistication as well; just getting back to the February 2007 price levels at which I bought my shares would triple today's share price. It's a white-knuckle roller-coaster ride in the land of high technology, and I'm fine with that.

Further Foolishness:

• AMD's Fusion Confusion
• Did Sirius Just Bottom Out?
• General Motors Playing Chicken
• Can We Afford All of These Bailouts?