As a turnaround investor, I like to put my money into companies that aren't doing well but still have a chance. This is important because investors often get the two mixed up. These two types of companies often trade at or near their 52-week low. But that is all they have in common.
The company is in trouble.
This is the company that's having trouble, but it looks like it can handle it. It just needs time to get back on track and right itself. How do we know that the company will be able to weather the storm? The best rule of thumb is to look at the balance sheet and income statement of the company. Does the company have more cash than it spends? Is the company likely to make money? If the answers to both questions are yes, then it's likely that the company in question is just down, but not out.
The company that is leaving. This is the company that is having trouble, but its future might not be certain. It could right the ship, but it might be too late by then. Because of this, shareholders will lose everything they put into the company. How can we be sure that the company that is out is the right one? Again, we have to look at the balance sheet and income statement of the company, which are the most important rules. Does the company have less cash than it needs? Is it likely that the company will continue to lose money for a while? If the answer to both questions is "yes," then it's likely that the company in question has gone out of business.
I think it's hard to understand when analogies are used without examples. So, I'll pick one company for every situation. Please don't take this as a suggestion to buy or sell something. This is just what I've seen after keeping an eye on these companies for a while.
Pfizer Inc. (PFE) could be considered a company that is going down. This week, the stock price fell to its lowest level in eight years because sales of its drug franchises were low and the company gave weak guidance. Due to uncertainty, management has chosen not to update their plans for 2006 and beyond. So, how about we look at Pfizer's balance sheet? According to the most recent information about Pfizer, the company has $ 15 billion in cash and other liquid assets and $ 5.517 billion in long-term debt. In other words, Pfizer has more cash on hand than it needs. What about money? Is it likely that Pfizer will have a loss? No, it's not going to lose money. In 2005, the company is expected to make a net profit of $ 14 billion, or $1.95 per share. The balance sheet is strong and there are a lot of profits. It's clear that Pfizer is a company that just hit a small snag.
What about (AMR) AMR Corp? This is a great example of a company that is no longer in business. When you look at AMR's balance sheet, you can see that it has a negative net cash of $9.5 Billion. This means that it owes more money in long-term debt than it has in cash. Is AMR money-making? Not even close. It is expected to lose $4.36 per share, or $714 million, in 2005. It's not a pretty sight. A company that is in trouble has a lot of debt and is losing a lot of money. If AMR doesn't change its ways soon, it might have to go bankrupt.
Investors need to be able to tell the difference between a company that is down and one that is out if they want to make money on a regular basis. Get rid of the companies that aren't worth investing in, and your return on investment will be much better.
