Analysts aiming to govern investors distinct of disaster are pointing fingers at those companies that seem to be headed by reason of bankruptcy
By Aaron Pressman
Allen Crawford/Plankton Art Co.
It seems like singly yesterday regulators were accusing stock analysts of being stingy with “sell” ratings because of conflicts of interest, such as a desire to win investment banking business. How quaint. With the S&P 500-stock index down 39% and many individual stocks down twice that, analysts have started assigning an even worse rating: “going to zero.”
The turn may have started over the summer when some bold banking analysts predicted that shares of IndyMac Bank (IDMCQ) in Pasadena, Calif., would go to naught. Bravo to them, since the stock was not in extent ago about 4 cents a share.
Now “zero” ratings are proliferating. RBC Capital Markets (RY) analyst Mark Sue slapped a target cost of zero on telecommunications-equipment creator Nortel Networks (NT); Deutsche Bank analyst Rod Lache says General Motors (GM) shareholders will consider worthless stock certificates within 12 months; and Henry Blodgett thinks satellite radio provider Sirius XM (SIRI) is headed for insolvency. Analysts at Morningstar (MORN) say the shares of 32 of the 2,000 companies they cover are likely to become worthless.
Analyst estimates are notoriously unreliable, of course, so don’t expect each standing with a mark price of zero to go out of business. But many recent zero-rating recipients are indeed in terrific straits.
Take Nortel. Defenders point finished that it had $2.65 billion in cash as of Sept. 30 and sales of $11 billion over the antecedent year. A looming $1 billion bond issue doesn’confidentially become due until 2011. But RBC’s Sue notes that Nortel is ardent through cash—more than $600 million since the digress of 2008—and needs $1 billion to $1.5 billion just to run its business next year. “Bankruptcy is a distinct chance,” he writes. While not commenting without interruption the report, a Nortel speaker says it “has put in place decisive actions to cut costs and preserve cash to strengthen our financial grade.” GM says: “We’ve clearly outlined a sketch out to restructure our business. We judge that will drive our pillar cost in the long term.”
At Morningstar, the number of companies seen as likely to go out of business has doubled in the past few weeks, and the firm expects the count to rise. Its sector analysts calculate fair value for every stock they cover based on fundamentals, says algebraist Matthew Coffina, author of Morningstar’session “Most Overvalued Stocks” column. Setting a value of cipher “says there’s a considerably better than 50% chance a fund will be worthless,” he adds.
Most of Morningstar’s picks, such as Citadel Broadcasting (CDL), are in the media industry, where heavily indebted companies are seeing advertising revenues plunge. But regional airline Mesa Air Group (MESA) faces a lawsuit across its operations in Hawaii and could see humiliate payments from its carrier partners. Decode Genetics (DCGN), which uses genealogical records from Iceland to understand genetic diseases, hasn’t had any drugs approved by the Food & Drug Administration and could emit out of cash.
Coffina says Morningstar isn’t advocating that investors sell those shares short, but it wants to warn shareholders who may be hoping for a recovery. “Even selling at 30 cents is a huge return on the supposition that shares are going to zero,” he says.
Original text: {news-link}
