5/7/12 12 Companies that Could Go Bankrupt Very Soon

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Monday, May 7th 2012Published by: StreetAuthority (Austin, Texas)

Warning: 12 Popular Companiesthat Could Go Bankrupt Very SoonIn the article below I reveal the names and ticker symbols of 12 widely-held companies that could gobankrupt in the near future. But first I need to give you a bit of background...

Every year, our independent research team here at StreetAuthority looks over thousands of potentialstock picks. We spend countless hours analyzing companies, looking for any signs that a stock iseither a good or bad investment.

Most of the companies we research have both bullish and bearish factors to consider. But in a fewrare instances -- literally less than 1% of the time -- we find a handful of stocks that boast some ofthe best business models on earth. These rare companies enjoy huge sustainable competitiveadvantages, pristine balance sheets, ample cash flow, and more often than not, they pay healthydividends. When we find rare gems like these, we like to buy these stocks and hold them forever. Infact, we recently published an entire presentation on our 10 best "Forever" stocks, and it hasbecome the single most popular piece of research in our company's decade-long history.

But sometimes we find companies that fall on the other side of the spectrum... companies that are insuch poor shape that they are at risk of going bankrupt. These companies often sport unnaturallyhigh debt levels compared to their capital base, and we think you should avoid these stocks at allcosts. If by some means they've already ended up in your portfolio, you might want to considerdumping them now.

Below you'll find a list of a dozen companies that I believe are at risk of failing.

By far, this is the most controversial article I've ever published. I'm obviously not making any friendson Wall Street by exposing these names, and my publisher has already fielded a number of angryphone calls from some of the companies that appear on the list below.

That said, since I'm continuing to publish this information for the benefit of our valued StreetAuthorityreaders, I want to make sure that I cover ALL of my bases here.

First, there's a difference between a company that's "at risk" of failing and a company that's"guaranteed" to fail. The stocks I profile in this article are "at risk" of failing -- they're not "guaranteed"to fail. In fact, many of the stocks on my list below may not fail.

Second, the metric I'm using to determine a stock's level of "risk" is called the "current portion oflong-term debt." Specifically, I'm looking for companies that have debts due within the next 12months that exceed the total cash balance that each company has on hand. This metric has provento be a highly accurate indicator of a company's health. In fact, it's already helped me correctlyidentify several "at risk" stocks before they went on to fail. That's why I use it.

However, like any other financial metric out there, the "current portion of long-term debt" has its

limitations. Although a company might have a high level of debt coming due in the next year, it doesnot guarantee that it will fail.

I'll explain more about this later in today's article. In the meantime, let's get started...

During the past generation, a reasonable level of debt has always been seen as appropriate,because balance sheets were able to withstand a typical recession. Yet all that changed in 2008.GM's (NYSE: GM) debt load crashed the company, forcing it into bankruptcy, while many othercompanies such as GE (NYSE: GE), Ford Motor (NYSE: F), Hertz (NYSE: HTZ) and Domino'sPizza (NYSE: DPZ) saw their stocks plunge on fears a bankruptcy filing would be necessary ifeconomic conditions worsened.

Thankfully, many companies wised up and have been taking steps to strengthen their balancesheets. But not everyone got the message. Some companies still carry too much debt and might runinto trouble if the U.S. economy slips back into recession. These companies will need to make largepayments to handle their debt, and right now they are at risk of not having enough cash to meet

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payments to handle their debt, and right now they are at risk of not having enough cash to meetpotential obligations. Typically, a company can simply roll over that debt and push out the time framewhen debts come due. But a weak economy would make this task much harder as lenders growskittish.

That's why it's so important to pay attention to balance sheets. Lots of debt is only a problem if thedebts are soon coming due. For example, mattress maker Sealy Corp. (NYSE: ZZ) has a very weakbalance sheet, with almost $800 million in debt and less than $100 million in cash. But managementwisely rolled over its debt while it could, and now the company faces no major repayments until2014.

But if a company's "current portion of long-term debt" -- that is, debts due within the next 12 months -- exceeds cash on hand, you need to listen to how management plans to address the problembecause these companies could be at risk of failing. I went in search of companies that may havejust such a problem (less cash than near-term loan obligations). I also added Canadian media firmThomson Reuters (NYSE: TRI) to the mix because its weak balance sheet is just above thatthreshold. The table below highlights a group of companies that are at risk of having to declarebankruptcy in 2012 if their lenders are in no mood to extend them more loans. Take a look...

Company (Ticker)Market

cap. ($M)RecentPrice

Long-termdebt/total

equity

EBITinterest

coverage

Cash($M)

Currentportion

oflong-termdebt($M)

Thompson Reuters (TRI) $21,640 $26.07 41% 5.6 $589.0 $1,083.0

Crown Media Holdings(CRWN)

$414 $1.14 306% 2.1 $21.0 $125.4

CAI International Inc.(CAP)

$296 $15.30 272% 5.1 $13.1 $79.8

Cost Plus (CPWM) $223 $9.92 135% Neg. $2.9 $77.0

Ram Energy (RAM) $218 $2.75 1,212% 7.9 $0.0 $0.4

Limoneira Co. (LMNR) $179 $16.10 167% NM $0.1 $2.3

Metalico Inc. (MEA) $156 $3.31 67% 2.4 $5.9 $14.2

Great Wolf Resorts(WOLF)

$87 $2.76 331% 1.1 $38.4 $67.8

American Apparel (APP) $80 $0.77 264% Neg. $8.0 $57.0

John B. Sanfilippo (JBSS) $78 $7.34 49% 4.2 $1.7 $49.8Dex One (DEXO) $74 $1.48 42,517% NM $195.4 $338.0

Inventure Foods Inc.(SNAK)

$67 $3.62 79% Neg. $1.4 $3.0

Neg. = The company is generating negative operating cash flow.NM = The company has no current interest payments.

This is just a short list. These stocks had red flags on the balance sheet as of September 30. Thecurrent earnings season may bring more troubled companies into this group. And if the economyslips into recession, as some -- but not all -- economists anticipate, then the list will only grow in thecoming months.

Some companies may be hard-pressed to avoid a date with a bankruptcy judge. Take AmericanApparel (AMEX: APP) as an example. The company is saddled with more than $100 million in debt,much of which is slated for repayment in the next few quarters, but it has less than $10 million incash on hand. American Apparel generates roughly $70 million in gross profits every quarter, but has$80 million in quarterly overhead. As the losses pile up, American Apparel's balance sheet couldweaken further.

American Apparel has already raised $22 million in fresh cash this year, but that might not be enoughto keep the wolves at bay. Billionaire investor Ron Burkle is one of several investors said to belooking at acquiring some of the company's debt -- not equity. That's often a precursor to eventualhostile moves to take control of the company by calling in debts, wiping out existing shareholders inthe process. Short sellers may also be anticipating an eventual bankruptcy filing, because they holdmore than 5 million shares in short accounts.

Even seemingly healthy companies can get tripped up by a lousy economy. Right now, ThomsonReuters carries a hefty, but manageable, $7.8 billion in debt. This shouldn't be a problem, as notedby EBIT coverage of about 5.6 (which means Thomson Reuters' quarterly cash flow is 5.6 timeshigher than its interest payments). But what if the economy stumbles and demand for the company'sprofessional-grade subscription services starts to slump? EBIT coverage would quickly shrink,forcing the company to meet with lenders to make sure Thomson Reuters doesn't run out of cash.

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forcing the company to meet with lenders to make sure Thomson Reuters doesn't run out of cash.This scenario is quite unlikely in the next quarter or two, but bears close scrutiny in a worseningeconomic environment.

Risks to Consider: Some of these stocks already trade at levels that suggest imminent financialdistress. If they're able to shore up their weak balance sheets, then short sellers may boost thestocks by short covering. And as I mentioned earlier, "current portion of long-term debt" is a goodmetric to consider, but it isn't perfect. It's important to realize that this metric only points to increasedrisk of financial trouble, and it does not imply that failure is imminent or inevitable.

Action to Take: If you own any of the 12 "at risk" stocks we've identified above, then consider sellingthem now, because all of them could tumble in a hurry. Instead, we'd suggest looking at the rare 1%of companies in our coverage universe that fall on the entirely OPPOSITE end of the spectrum --financially-stable companies that enjoy some of the best business models on earth. We call them"Forever" stocks. These stocks benefit from sustainable competitive advantages, pristine balancesheets and ample cash flows, and we think you can buy them today and hold for the rest of your life."

In fact, when we started to research "Forever" investments, we discovered something very unusual -- many of the world's richest, most successful investors, politicians and businessmen are loading upon "Forever" stocks. For example, one of our favorite "Forever" stocks has jumped 585% since itwent public just a few years ago, and legendary investors like Warren Buffett are loading up on thestock. In fact, Buffett has bought more than 9.3 million shares of this "Forever" stock in recentmonths.

For more on these stocks -- including several names and ticker symbols -- we've put together aspecial presentation called "The 10 Best Stocks to Hold Forever." Just click on the video below towatch it right now.

-- David Sterman

The 10 Best Stocks to Hold Forever

Warren Buffett, Goldman Sachs, John Kerry... maybe even YOUR own Congressman already ownmany of these stocks.

Now regular Americans like you and me can pull back the curtain and buy these "forever" ideas. Myadvice: Buy them, forget about them, and hold them forever. Watch below to get started right now...