Given the pressures we’re seeing in many areas of the economy, it’s no surprise that businesses are feeling the heat. That’s got us looking at a few stocks on bankruptcy watch.
When it comes to investing, the dreaded “B-word” tends to evoke a strong reaction from investors. Suddenly, no one seems to want to own a now-toxic holding once the “bankruptcy” word starts getting tossed around.
It doesn’t help that common stockholders are one of the last priorities when it comes to getting paid out of bankruptcy proceedings. Instead, preferred shareholders, debt-holders and other investors come first in the pecking order.
Interestingly, we’ve seen some strong bullish reactions in a few of these stocks so far this year. So, can they keep up the momentum? Let’s discuss, and diver deeper into these three stocks on bankruptcy watch this year.
|Bed Bath & Beyond
Bed Bath & Beyond (BBBY)
At one point last year, it appeared there could be hope for Bed Bath & Beyond (NASDAQ:BBBY). The retailer generated surprisingly-strong free cash flow, while relatively new leadership under Mark Tritton gave investors hope.
While the first few quarters of Covid were bumpy for retailers, Bed Bath & Beyond began hitting its stride. Or so it appeared. After a couple of good quarters, the retailer starting disappointing investors.
Despite a few short-lived “meme stock” short-squeezes, Bed Bath & Beyond stock has really struggled lately. Given how its business has progressed, that’s no surprise. The retailer is experiencing pressure on its top- and bottom-lines, while the company’s significant debt load continues to weigh on its balance sheet.
Bed Bath & Beyond recently missed an interest payment and is having trouble paying its vendors. Shortly before a recent capital raise, Bed Bath & Beyond even said bankruptcy protection was an option on the table. Thus, this is among the retailers I think is worth avoiding at all costs right now.
Another mania stock that’s under tremendous pressure? Carvana (NYSE:CVNA).
Once dubbed the Amazon (NASDAQ:AMZN) of used cars, this name has struggled. Shares are down more than 92% from the company’s 52-week high, and have fallen roughly 97% from their all-time high.
When supply chain woes weighed on new car production (and thus new car sales), the value of used cars exploded. That propelled Carvana stock higher at the time. It helped that we were in the midst of an unchecked bull market with rampant speculation. However, as with a short-term sugar high, the whole thing has come crashing down.
Carvana has made it clear to investors that its business is struggling. As noted by Barron’s:
“And about that debt. Total liabilities at the end of September equated to almost $9.25 billion with just $666 million cash on hand. Not only that but diluted earnings per share in the 12 months prior was -$9.05.”
That’s a major problem for a company that has a market cap of just $2 billion and can’t turn a consistent profit. Oddly though, investors can’t stop buying the stock. Despite the recent pullback, shares are still up more than 200% from their recent low.
Last but not least, we have Canoo (NASDAQ:GOEV). When the EV SPAC revolution exploded shortly after Covid, I had a bad feeling about how it would end. I didn’t know when it would end or how high these stocks would go, but the valuations simply didn’t make sense.
Many of these names were garnering multi-billion valuations without any revenue in sight. Some just had a concept to go on. That’s not really an improvement from the dot-com bust 20 years prior. Only instead of websites, it was EV stocks that were somehow going to displace the stronger, more experienced and wealthier automakers.
With Canoo specifically, total assets are currently about double liabilities. However, current liabilities to current assets are an issue. With just $40.4 million in cash on hand at last check, the company’s currently liabilities of $183 million look pretty daunting.
Negative free cash flow and (still) zero dollars in revenue isn’t helping matters. Not to mention a wave of executives and insiders hitting the exits. Indeed, the prospects here don’t look good right now for Canoo.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.