27 Companies That Could Go Bankrupt

June 15, 2012

Commercial bankers are a fickle lot. When the economy is growing, they trip over each other to extend loans to anybody with a business plan. But when the economy cools, bankers slam the lending spigot shut, denying loan applications to any new borrowers while taking a nervous stance with existing borrowers.

And this can spell trouble for any company that has been relying on credit lines or any other short-term loans. When an economy slows, bankers look for excuses to call in these loans — especially if a customer looks to be in a weak financial position.

Well, I’ve come across 27 companies that are starting to sweat. They all carry short-term loans (due in 12 months or less), and right now, they don’t have enough cash on hand to come up with the funds if the bankers come knocking.

Covering their interest expense?

Not only do these firms need to worry about bankers calling in loans, they also need to keep an eye on their cash flow. In some instances, these firms are only earning enough to cover their interest expenses, let alone the principal amount on their loans. These 10 companies have too little cash on hand — and they are also generating negative quarterly cash flow.

Back in November, I warned readers that stocks like American Apparel (AMEX: APP) were headed for trouble. I checked back in around January, once again sounding the alarm bell. What’s happened since then? The stock is hovering around $0.85, as you can see from the table above, the danger of bankruptcy is still there.

To assuage bankers, companies need to prove that they can at least generate enough cash flow to cover interest payments. These four companies have interest coverage less than 1.0 (which means that cash flow, though positive, is less than interest expense).

Of course, a quarterly snapshot may be unfair. Companies like PC Mall (Nasdaq: MALL) may do the bulk of their business every year during the holidays, so interest coverage can look scary in a seasonally weak quarter. Still, the company would need to convince lenders to be patient until the end of the year rolls around. Having more debt than cash never makes a banker happy.

There are also companies that generate decent cash flow now, but must hope the economy doesn’t get much weaker. If sales fall by a moderate amount, cash flow can often fall at a much faster rate. These 13 companies have an interest coverage ratio between 1.0 and 4.0, which is “good enough” for now. Then again, every one of them has more short-term debt than cash, which is never a good position to be in.

If the U.S. economy muddles through and avoids recession, then many of these 27 companies will find a way to keep the bankers at bay, rolling over their debt into next year. Yet a few of these companies will likely fall prey to nervous bankers, and will see their loans called in.

If the U.S. slumps into recession, then almost every one of these stocks will be vulnerable to bankers’ whims. And once investors get word that a company has a problem meeting its debt obligations, massive sell-offs can occur.

Risks to Consider: Some of these stocks already trade at levels that suggest imminent financial distress. If they’re able to shore up their weak balance sheets, short sellers may boost the stocks by short covering. But if you own any of these stocks, it simply might not be a risk worth taking.

Action to Take –> If you own any of the 12 “at risk” stocks we’ve identified above, then consider selling them now, because all of them could tumble in a hurry. Instead, we’d suggest looking at the rare 1% of companies in our coverage universe that fall on the entirely OPPOSITE end of the spectrum.

We call them “Forever” stocks. Put simply, this is the only set of stocks we know of that you can buy today and hold for the rest of your life. When you own them, you no longer need to worry about things like inflation or deflation… bear markets or recessions… flash-crashes or rising interest rates.

For example…

One of our favorite “Forever” stocks has plowed through eight bear markets and returned 194,000% since 1972. Every $100 invested back then, would be worth $194,000 right now. Today, the company is raising its dividend, spending billions to buy back its own shares, making smart acquisitions, and is the dominant leader in a $30 billion market.

Maybe that’s why Warren Buffett and his investment team at Berkshire Hathaway (NYSE: BRK-B) bought 7.7 million shares of this “Forever” stock.

This sort of “worry-free” performance is exactly the reason why the research staff here at StreetAuthority has put so much time, effort, and money into completing our list of 10 “Forever” stocks.

If you want to read all our research on this select group of “Forever” stocks, we’ve put everything together in a brand-new research report titled The 10 Best Stocks to Hold Forever for readers of our Top 10 Stocks advisory — which is edited by Paul Tracy, StreetAuthority co-founder and Chief Investment Strategist.

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