Lights Out for Alcatel-Lucent
By Richard Band, Profitable Investing
Hope is one of the most beautiful of human emotions. It pulls us out of bed in the morning to greet the world. In the financial markets, though, hope can prevent investors from facing the truth.
You see this phenomenon day after day in the stock market’s “most actives” list.
Whether on the NYSE or Nasdaq, each session’s list of most heavily traded stocks includes a generous peppering of companies with share prices well below $5 (often $2 or less). These are stocks that investors — speculators, really — keep buying as cheap lottery tickets.
The hope is that some of these super-low-priced names will pay off big. The reality is that most won’t be in business by 2020.
I could point out a number of such doomed “cheapie” enterprises, but I’ll give you just one: Alcatel-Lucent (NYSE:ALU). Shares of the telecom-equipment maker have lost two-thirds of their value over the past 21 months. Simply put, Alcatel is falling behind major competitors in developing the next generation of wireless data gear.
Can ALU regain its edge? One key financial development says no.
In December, Alcatel announced plans to refinance 3.4 billion euro of its shorter-term debt (with an average coupon of 5.9%) for longer-term debt with an average coupon of 7.4%.
No healthy company in today’s world buys back lower-yielding debt in order to issue higher-yielding debt. This deal has an air of desperation about it.
Sell ALU if you’re unlucky enough to still own the stock.
At the time of publication, Band had no positions in the securities mentioned.