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Companies That Might Not Survive This Crisis

It's unlikely that Jamba will survive in its current form and I would avoid investing in this penny stock. So why even mention Jamba?

When you think about it, Jamba itself is really irrelevant. But there are two important takeaways here. First, avoid fad stocks, as their success is usually brief. The second takeaway: At $1.99 per smoothie, McDonald's would have to sell about 175 million smoothies to equal all of Jamba's annual revenues. That might sound like a huge amount of smoothies, but for McDonald's, it's not. With 14,000 stores in the U.S., each McDonald's location would have to sell about 17 smoothies a day (on average) to eclipse Jamba's sales. That will be relatively easy for McDonald's to achieve and you can bet that McDonald's will have much higher profit margins on those smoothie sales, so the company may not even have to sell as much as I just calculated.

Your Homework

There are several ways you can identify companies that may not survive financial distress. Some of those key indicators are:

  • Low z-scores (I have created a helpful tool on my Web site, TheFinanceProfessor.com, which will enable you to calculate z-scores from any set of financial statements. Please note: Z-Scores are not applicable for financial services companies.)
  • Declining market share
  • Fad-type product lines that dominate sales
  • Cash burn and increasing debt load
  • This week, take a fresh look at your investments and identify any companies that fall under any of these categories and consider taking action now.

    That action may be:

  • Sell the investment outright
  • Trade your stock in for a dominant company in the same industry that will likely survive and emerge from the current crisis stronger. For example, sell AMD and buy Intel. Consider this: It would have been wise to sell Circuit City and, in its place, invest in Best Buy (BBY).
  • At the time of publication, Rothbort was long AAPL, GILD, GOOG and MCD, although positions can change at any time.

    Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele.

    Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.

    Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.

    For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com. Scott appreciates your feedback; click here to send him an email.

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