IFB48: When a Falling Stock Indicates a Failing Business

 
Welcome to Investing for Beginners podcast this is episode 48. Andrew and I are going to talk about distressed businesses or negative earnings, negative shareholder equity we’ve never really delved into that aspect of investing and kind of what to look for in companies that having falling stock prices.
We’re going to talk a little bit about maybe some cautionary tales as you’re looking for companies to invest in for your potential retirement,

* The importance of the price to cash ratio
* The impact of declining shareholder’s equity
* The impact of declining earnings
* What to look for in the financials of a falling company
* Not every falling company is failing

Without any further ado, I’m going to turn it over to Andrew as always and let him start us off.
Andrew: yeah so I mean we did a bunch of episodes on beginning with the basics. I think let’s dive in we haven’t done anything pretty technical in a while, and I always love to talk about I know some at least some of our listeners like to hear about it.
I thought maybe we could like stay relevant. Obviously there’s been a couple of things that have happened lately, and I realized in the podcast world by the time this comes out it’s going to be months old news. But we had Tesla lose taxpayers billions of dollars we’ve talked about Tesla before so I’m not going to talk about that story with the whole SpaceX thing.
But there is another one, and it’s Sears Holdings it’s on CNBC, and the media and everybody talks about the fall of retail and talks about how Amazon’s taken over that space. And then made a lot of businesses fail and it is very true, and I thought this could be one that we’ll look at a little bit deeper and see.
Because obviously if you look at the stock chart it’s been beaten down and with stocks that are being down sometimes that comes an opportunity. Because then you can buy a low price for Sears, in particular, I will look at like a basic price to cash. The price of cash is 1.8 which means if you’re buying this stock you’re almost getting the cash if the price the cash was 1.
That means let’s say you’re paying a hundred million dollars to get a hundred million dollars in cash like that’s like almost getting like free cash.
It sounds like a like a great value play, but I think you’ll find as we dig deeper into the numbers that there’s more to this story and that even though you see a couple of good metrics from a value standpoint. Because the complete picture isn’t all there than it is a cautionary tale and there are several different symptoms with Sears right now that signal a business in decline.

I think those are some of the things that you should look at when you’re looking at evaluating various stocks particularly in ones where industries are being I don’t want to say under attack or siege. But going through a lot of change so obviously retail is one of those and with a lot of change comes a lot of opportunities.
But also a lot of risks anytime you’re getting into what’s almost called like a devalue with really distressed companies it’s very important that you are differentiating between opportunity or risk.
Dave: yeah exactly and I think the big thing was Sears is you look at the evolution of the company over the last eight, nine years, and they’ve been in a kind of a scramble mode to try to figure out how to stay relevant and stay alive.
And as Andrew and I were talking about preparing for this episode tonight I was looking at just a price chart of the company in since 2009. They were at the height of 122 dollars a share and currently they’re at three dollars and 33 cents a share.
That is quite a precipitous drop the city of the least a...