In my Top 10 Stocks to Avoid in 2009, I suggested that investors stay away from stocks impacted by a handful of specific themes that will play out during the coming year.
Stocks impacted by higher fuel prices, a stronger U.S. dollar, and high defaults in the credit card space should be investment afterthoughts in 2009.
One theme that did not make the list, and probably should have, are companies with so-called debt bombs set to go off at some point during the next year. There are many businesses that have big debts coming due in 2009.
With the credit markets in disarray, the likelihood of obtaining new loans to replace old debt is difficult at best. As such, companies must obtain concessions from bond holders or run the risk of going into default. Whatever scenario plays out, the result is likely to be negative for common shareholders. With so much risk, it makes little sense to venture into stocks with these issues outstanding.
Take the auto industry, for example. Common shareholders are already low on the totem pole, and with news of the bailout that position is even more tenuous. Terms of the government loan require conversion of existing debt to equity. That dilution is negative for shareholders, so it's best to just stay away.
There are a number of companies facing these issues. This drama will unfold for one of my favorite names, Sirius XM Radio (NASDAQ: SIRI). This lightning rod of a company has nearly a billion dollars of debt coming due next year. It is very much a question of whether they can refinance or obtain concessions needed to satisfy debt holders. With shares trading for pennies, investors are assuming the worst. That is probably a good assumption.
That said, one never knows what can happen when debt is refinanced or renegotiated. Some companies doing so are seeing their shares move substantially higher. Macy's (NYSE: M) is a good example. Last week, the company announced that it had made changes to an existing line of credit in hopes of having more flexibility in dealing with its own $1 billion in bonds coming due in 2009. Investors cheered the move and the stock soared.
And on Friday, it appeared that American Apparel (AMEX: APP) had dealt with its own debt bomb issues. The company announced that it had extended lines of credit for three months. The extra time will give the company some breathing space as it looks for more permanent longer-term financing. This is not much of a reprieve, but investors were supportive nonetheless, as the stock exploded after the news was announced. Shares gave up much of the gains though as investors realized the news was only a stay of execution.
Clearly there is a lot of risk with these debt-bomb companies. But resolution of said issues can prove to be very lucrative for investors. Ultimately, though, common shareholders are merely guessing at this point as to whether debt issues can be resolved.
I would stay away however tempting it may be to jump in. The time to buy these companies is when there is a bit more clarity. You might miss out on the initial jump, but the decimation ensures there will be plenty of meat left over.
Jamie Dlugosch is a contributor to InvestorPlace.com.
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Reader Comments (Page 1 of 1)
12-28-2008 @ 2:09PM
sloane said...
I have a paltry share in American Apparel and was perversely excited to see the price drop, just because I have wanted to buy a larger share for quite a while.
I wish I had a better understanding of debt and financing to make a more informed decision, but it is at least a product I understand (I fit into their target demographic), and I think that its sales will be more recession-proof because of its target demographic (young people who had so little to lose in the first place that they aren't a lot worse off than they were before).
Dr. Tantillo ('the marketing doctor') did a post on his blog a long time ago about how American Apparel effectively incorporates CSR into its brand. For me, this is another reason they are positioned to do well (in spite of skeeviness of CEO).
http://blog.marketingdoctor.tv/2008/03/28/dr-tantillos-30second-how-to.aspx