In " Balance Sheet 101: Who Might Survive This Crisis" (November 2008) I focused on companies with large net cash positions ("cash kings") and the concept of the "z-score," which is an indication of balance sheet strength and potential for bankruptcy.At the end of " Balance Sheet 101: Who Might Survive This Crisis," I highlighted three companies that needed to get their fiscal house in order or could face possible bankruptcy. Since then, those three companies -- Macy's ( M), General Motors ( GM) and Time Warner ( TWX) -- have reported another quarter of financial results. All three companies have experienced further deterioration in business and have to resort to layoffs -- and in GM's case, a government bailout -- to try to steady their financial condition. As of the end of the last quarter of 2008, the z-scores for these three companies now stand at the following levels:
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.
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).