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.
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).