by Lawrence Meyers | February 21, 2012 11:11 am
Using debt to fund a business’ growth is just fine. But taking on too much debt — and not being able to pay interest on that debt — is a recipe for bankruptcy. A lot of companies got caught with their pants down in the financial crisis by being overleveraged. Some of them still are standing today, but they are the equivalent of a two-legged chair.
Here are some companies so loaded with debt that you should consider shorting them, as bankruptcy is a very real possibility.
MGM Resorts International (NYSE:MGM) is the victim of really bad timing. It took down a ton of debt and built the massive City Center in Las Vegas just as the financial crisis hit — thus, MGM had all these units to sell, and nobody with any money to buy them. The company sits on $13 billion of debt and is losing money every year. So far, MGM has kept creditors at bay, but I wonder how long that can last. This is a long-term short, and I’d set a stop-loss in case some white knight comes to MGM’s rescue.
Thomson Reuters (NYSE:TRI) has a dual problem. First, it carries $6.8 billion in debt. Second, it operates in a slowly dying sector. Fewer and fewer people get their news from wire services and newspapers anymore. It’s all Internet now. Thomson is in danger of becoming the horse and buggy to the Internet’s airplane.
Avis Budget Group (NASDAQ:CAR) might be in for a serious crash. Yes, the company has more than $1 billion in cash, but it’s offset by $2.4 billion in debt. That might not be so bad, except Avis is running free cash flow negative to the tune of $6.5 billion in the trailing 12 months. One thing to be careful of — the rental car companies have been bought and sold a zillion times each, so careful with that short.
I’d also take a good, long look at solar energy stocks. After the Solyndra debacle, it’s pretty clear that alternative energy companies have a tough road. The dirty little secret about solar is that it only pays for itself because of government subsidies. Those won’t last forever. One of them, Evergreen Solar, already is operating under bankruptcy. LDK Solar (NYSE:LDK) has more than $650 million in debt, and the head of its audit committee resigned last summer — the perfect setup for a short.
And no discussion of shortable stocks with loads of debt is complete without mentioning the airlines. I’ll pick United Continental (NYSE:UAL) as the next airline to go bankrupt — again — with its $11.8 billion in debt. With oil prices headed higher again, it’s only a matter of time.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.
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