Level 3 Will Ride Virtuous Cycle

This column was originally published on RealMoney on Jan. 8 at 8:43 a.m. EST. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.

We haven't had a stock with the virtuous circle going for it in a long time. Don't know what that is? It happens when a stock goes higher; as it goes higher, it solves a lot of the balance sheet problems that would otherwise haunt it.

That stock is Level 3(LVLT Quote).

I know I have repeated myself often about Level 3. I think I have to, though. The stock is not well-liked, not because of its products or strategy -- I don't know anyone who thinks that ultimately a company that has spare bandwidth and programs to manage the onslaught of online video is a bad buy. Especially when it is run by a seasoned survivor of the telco wars, Jim Crowe.

Why is it so unloved? Simple: The balance sheet is just awful.

How can you cure a balance sheet? Simple: You get the stock higher so the company can issue equity to cure the bad balance sheet. I think that could be the way that Level 3 gets out of the very real jam that could occur as the company's debt schedule matures.

Even without it, as the business does better -- and it seems to be on that way, witness the JP Morgan number bump this morning on the closing of the Broadwing(BWNG Quote) deal -- watch the bonds. If you own the bonds, you could easily see that this company's free cash flow is going very positive. That gives Level 3 a chance to refinance with a lower coupon, especially when you consider that rates are very low, much lower than when management loaded up the boat with debt.