Loral Space & Communications (NYSE:LOR) finally bit the bullet yesterday and filed for Chapter 11 bankruptcy. This milestone is a painful ending to a tough period, and reinforces a valuable lesson to investors.
It was hard to find a better story than Loral's in the late 1990s. The company built and launched satellites, and seemed well positioned to take advantage of what looked to be a huge demand for space-age carriers of data and telecommunications traffic. Plenty of analysts were touting Loral as a great way to take part in the explosion. I bought into the story at $18 per share (pre-reverse 1-for-10 split).
The problem for me was trying to keep up with a company in an extremely capital-intensive business that was running up a large amount of debt. A few months after buying the stock, I needed to shift some funds elsewhere, and rather luckily decided to sell Loral.
In the months that followed, it ran into a string of misfortune. Rockets carrying satellites exploded. A 40% stake in Globalstar backfired when consumer demand for satellite telephones never materialized. It was fined for passing sensitive missile guidance technology to China. Too many satellites in the sky meant overcapacity, just like the earthbound telecommunications industry. Loral kept losing money, and had trouble borrowing more because of its steep debt.
The lesson, of course, is that great stories will only get you so far. Sooner or later, a company has to make some money. If you want to invest in such stories, you should only commit a small amount and keep a close eye on them. It's all much easier said than done, of course -- I take absolutely no credit for getting out of the stock without a loss -- but it's something to keep in mind.
