The increasingly bad news about the economy has put me in a bit of a black mood. I happen to believe that things are going to get worse before they get better, and many of our leaders' and policymakers' moves lately haven't instilled me with much confidence.
And I think that part of the "getting worse" is going to be a wave of bankruptcies from household names. It's already started: The bankruptcy proceedings or outright demise of companies like Circuit City, Ritz Camera, and Bennigans suggest that when it all shakes out, the streets of Generica are going to look a whole lot different.
Why? A lot of companies were riding the wave of that recently burst asset bubble, which was fed -- or rather overstuffed -- with easy credit and the over-indebted consumer. If they were struggling before the market and the economy tanked, or if they were kept aloft by the boom times' often silly extravagances… well, maybe it's time to wave goodbye to them.
It's easy to say that most companies are struggling right now, but even in an economy like this one, some are much worse off than others. How can you tell if a company is in danger?
- It has lots of debt but little cash.
- Its brand is tarnished, or it's become "second string" or worse in an industry.
- It's dependent on a fading fad.
For example, the following companies all exhibit one or more of these traits -- which means that in a difficult economy, I suspect they will at the very least continue to struggle, and at worst fold altogether. In any case, you'd be wise to avoid them.
(NYSE:RSH): For goodness' sake! If Circuit City's toast, I've got to wonder how RadioShack's going to survive. It's got a limited selection of odds, ends, wires, batteries, and, oh yeah, cell phones, which only help it sometimes. It also faces major competitors like Best Buy (NYSE:BBY). Is there really still room for the anachronistic RadioShack in a less bubbly world?
(NASDAQ:CROX): I've never been much of a fan of Crocs, but now its once-ubiquitous colorful clogs remind me of fads like telephone booth stuffing or the hula hoop -- trends that can fade abruptly when people get just a tad more serious about life. Like now.
(NYSE:BGP): Sorry, but buh-bye, Borders. The competitive landscape was intense even before the economic downturn hit. And even though it's been trying to whittle away at its debt, its long-term debt-to-equity ratio of 128% gives yet another reason to doubt a happy ending for this bookseller.
(NASDAQ:SHLD): Customers weren't flocking into Sears even before the economy went south. Its discount retail rivals like Wal-Mart (NYSE:WMT)are far savvier, and it seems like people have nearly forgotten Sears exists. Sorry, Eddie Lampert fans, but Sears saw its best days long, long ago, and the current waste being laid to the retail landscape makes me think Sears might become a thing of the past.
Find the winners
But just because many companies will feel the heat of the downturn doesn't mean there aren't companies that will flourish.
For example, Borders may be limping along on its last legs, but Amazon.com
But Amazon.com isn't the only one. You want to look for companies with solid management teams, excellent business models, and strong balance sheets. That's how you'll find the best, brightest, and strongest stocks to own for the long term.
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Alyce Lomax does not own shares of any of the companies mentioned. Best Buy, Sears Holdings, and Wal-Mart Stores are Motley Fool Inside Value selections. Amazon.com and Best Buy are Stock Advisor selections. The Fool owns shares of Best Buy. The Fool has a disclosure policy.