If only 20/20 hindsight came with a time machine, then we’d never lose any money in bad investments. Fortunately, there is this thing called due diligence that is supposed to help us avoid those entanglements in the first place. Sometimes, however, that isn’t enough. You must always keep a close eye on your company’s story, and that story changes from quarter to quarter, and even on a daily basis.
I’ve found four companies whose stories are turning into Grimm fairy tales with horrifying endings. Sell them before the book closes:
Sprint Nextel (NYSE:S) is a terrifying tale. There’s nothing worse than owning a commoditized business, unless it’s a really expensive business to run. That’s the fate that befalls Sprint Nextel. Not only must it compete with massive companies like AT&T (NYSE:T) and Verizon (NYSE:VZ) but it must do so amid flat revenue, declining free cash flow and annual losses.
Sprint is expected to report losses at least through 2012, and it doesn’t even pay a dividend. At $2.88 per share, there isn’t much reason to short, nor is there any reason to buy. But if you are holding on waiting for a miracle, the only one you’ll get is a buyout by some other entity for a tiny premium, if any. And with $18 billion in debt, I wouldn’t even count on that. Sell Sprint.
MGM Resorts (NYSE:MGM) looked like it might be able to reverse course this past year, but the company just isn’t making enough money with $6.3 billion in annual revenues to make a dent in its $12.6 billion in debt. That debt is mostly the result of the massive CityCenter complex in Las Vegas, which cost more than $9 billion and went up just as the financial crisis hit.
Worse, MGM has almost $1 billion in debt coming due during the next year, and it might have to draw on its credit facility to pay that off. There are loan covenants to meet, and money to spend to keep the properties they have up to snuff. All that takes away from what cash flow the company can generate. MGM is a definite sell, and might even be a short.