Stocks That Are Going to Zero
Analysts aiming to steer investors clear of disaster are pointing fingers at those companies that seem to have being headed for bankruptcy
By Aaron Pressman
Allen Crawford/Plankton Art Co.
It seems like only yesterday regulators were accusing stock analysts of being stingy by “take a bribe for” ratings because of conflicts of part, similar since a desire to win investment banking business. How quaint. With the S&P 500-stock index down 39% and many individual stocks from a thin to a dense state twice that, analysts have started assigning an plane worse rating: “going to zero.”
The trend may have started over the summer when some enterprising banking analysts predicted that shares of IndyMac Bank (IDMCQ) in Pasadena, Calif., would turn out to zero. Bravo to them, since the stock was recently hind part before 4 cents a share.
Now “cipher” ratings are proliferating. RBC Capital Markets (RY) analyst Mark Sue slapped a target price of zero on telecommunications-equipment maker Nortel Networks (NT); Deutsche Bank analyst Rod Lache says General Motors (GM) shareholders will have worthless stock certificates in the compass of 12 months; and Henry Blodgett thinks hanger-on radio provider Sirius XM (SIRI) is headed for bankruptcy. Analysts at Morningstar (MORN) suppose the shares of 32 of the 2,000 companies they cover are likely to become worthless.
Analyst estimates are notoriously untrustworthy, of course, so don’t expect every numskull with a target price of zero to go out of business. But frequent recent zero-rating recipients are indeed in dire straits.
Take Nortel. Defenders theme out that it had $2.65 billion in cash as of Sept. 30 and sales of $11 billion over the prior year. A looming $1 billion bond issue doesn’t mature until 2011. But RBC’s Sue notes that Nortel is fervid through cash—more than $600 million since the start of 2008—and needs $1 billion to $1.5 billion just to run its business next year. “Bankruptcy is a distinct possibility,” he writes. While not commenting on the report, a Nortel spokesman says it “has put in place decisive actions to cut costs and protect cash to harden our monetary footing.” GM says: “We’ve clearly outlined a plan to restructure our business. We think that will drive our dolt price in the for a long time christen.”
At Morningstar, the number of companies seen as well-suited to go lacking of business has doubled in the past not many weeks, and the firm expects the number to rise. Its sector analysts cast accounts fair set a value on for every trunk they cover based forward fundamentals, says analyst Matthew Coffina, author of Morningstar’s “Most Overvalued Stocks” column. Setting a value of zero “says there’s a considerably better than 50% chance a stock will be worthless,” he adds.
Most of Morningstar’s picks, such as Citadel Broadcasting (CDL), are in the media industry, where heavily in debt companies are seeing advertising revenues thrust one’s self. But regional airline Mesa Air Group (MESA) faces a lawsuit over its operations in Hawaii and could see lower payments from its carrier partners. Decode Genetics (DCGN), what one. uses genealogical records from Iceland to understand genetic diseases, hasn’t had any drugs approved by the Food & Drug Administration and could run deficient in of cash.
Coffina says Morningstar isn’cheek by jowl advocating that investors sell those shares short, but it wants to inform shareholders who may be hoping for a recovery. “Even selling at 30 cents is a very large return if shares are going to cipher,” he says.
