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5 Cash-Burning Stocks to Extinguish From Your Portfolio - views
BALTIMORE (Stockpickr) -- When it comes to cash, a handful of stocks are shouting “burn, baby, burn.” If you own any of these names, I’d recommend pulling out the fire extinguisher for your portfolio.
There are few red flags as bright and glowing as a high cash burn rate. I know the saying is overused, but cash truly is king. That’s why firms burning through cash at a fast pace are sending a big message to investors -- one that they often don’t want to send. Maybe more importantly, it’s a message that investors won’t get by turning to the usual metrics like earnings.
I realize that seems surprising, but there’s a good reason why cash offers so much more transparency.
You see, there’s a difference between “profits” (the GAAP accounting definition used in financial filings with the SEC) and the amount of cash that a firm takes in. While firms can use a myriad of accounting loopholes to book big profits without seeing a cent, they can’t claim cash unless they’ve got it on hand. Cash is also one of the most easily verified assets for auditors to check on -- and the one they typically hit first.
That combination of limited flexibility and high levels of assurance make cash an important number for investors to watch. And that’s especially true when it’s pouring out of corporate coffers.
Firms burning cash -- that is, companies that are depleting their cash reserves -- are ticking time bombs. They’ve got a limited amount of time until they’re forced to raise money by either a pricey debt offering, or a dilutive equity or asset sale. For that reason, it makes sense to unload any names that are burning through cash at an alarming rate.
Today, we’ll take a look at five firms that fit that description.
Royal Caribbean Cruises
2012 has been a year of rough seas for Royal Caribbean Cruises (RCL). Shares of the $6.5 billion cruise line shares have bounced between substantial gains to substantial losses several times over the course of the year.
And while shares currently sit on the upper end of the stock’s range as we enter the fall, investors need to be aware of some less attractive attributes in this stock. RCL’s cash reserves have been more than cut in half in the last year, down to 212.2 million.
Royal Caribbean’s No. 2 spot in the cruise industry is enviable, and so is the firm’s lineup of brands. Besides its namesake line, Royal Caribbean also owns Celebrity Cruises and a handful of regional operators in Europe. But that positioning doesn’t change the fact that RCL operates in a capital intense business with inconsistent margins and huge exposure to commodity prices. In the latest quarter, RCL only earned 9% more than its interest expenses before taxes. That’s not a great sign.
Let’s face it: Cruising is a business that’s driven by consumer discretionary spending. With consumers still keeping a tight handle on their purse strings in 2012, RCL’s cash burn isn’t likely to abate in the near-term. The firm’s balance sheet is already taxed. Don’t get caught waiting for RCL to raise capital before selling.
I suppose you could say that Pandora Media (P) is one of the good recent tech IPOs. After all, the firm hasn’t gotten shellacked like the rest of its peers, and until lately, the stock has looked a whole lot stronger from a technical perspective than most internet names.
I’m inclined to agree. That’s why Pandora didn’t make it on my list of short-worthy social media names.
But I still think that cash burn is a big enough concern to warrant selling Pandora.
Pandora’s burn rate weighed in at an annualized $64 million, nearly enough to deplete the company’s post-IPO coffers in a single year. At the same time, the firm’s reports earlier this month that listening hours are increasing means that royalty fees are going to be on the increase as well. With Pandora’s model not mature enough to establish profitability in-line with listening hours, that’s going to eat more cash.
Even though the firm’s debt-averse approach to maintaining a balance sheet is commendable, it also makes a dilutive equity offering a strong possibility in 2012.
I also featured Pandora in "4 Hot Stocks to Trade (or Not)."
The past few years have presented a challenging environment for TiVo (TIVO). The firm that pioneered the DVR has seen the value of its shares get halved from their 2010 highs, after ongoing legal drama promised to change the firm’s fortunes and then reversed again.
I almost don’t like adding TiVo to this list. in a way, it’s sort of like kicking a company while it’s down. But there’s a silver lining to be had in this stock.
First of all, TiVo is burning cash. The firm’s annualized burn rate comes in at an annualized $114 million. While cash balances increased dramatically after a series of legal settlements that will provide a series of payments through 2018, the firm is still fixing a hole in its gas tanks by dumping a bunch of gas into them. Once that supply runs out, investors will be out of luck. And that’s a real problem given the bargain price that TiVo is trading for.
Net of debt, the firm’s cash position and locked-in legal payouts cover the majority of TiVo’s market capitalization. So assuming that the firm’s remaining business is worth anything, investors are getting a bargain. Management just needs to shed unproductive products and start returning some of those huge cash reserves to shareholders.
While I’d recommend getting rid of TiVo before management spends all of its loot, this stock does have turnaround potential if the powers that be can figure out an effective way to plug the profitability holes and give the company’s owners some of that cash.
For another take on TiVo, it was also featured last month in "5 Stocks Set to Soar on Bullish Earnings."
Up next is agribusiness Bunge (BG), a $9.6 billion firm that bridges the gap in the commodity food chain. Bunge acts as a middleman between farmers and consumers, processing raw agricultural commodities on one side, and supplying farmers with products like fertilizer on the other.
When it comes to nearly any industry, it’s worst to be the middleman. Not only do middlemen have the potential to get price squeezed from both sides, they also have partners looking over at their profitability wondering whether it makes sense to let a third party collect a payday when they could do it themselves.
But Bunge’s paper-thin margins have meant that the firm isn’t fighting off too much competition right now. Instead, Bunge sees plenty of internal challenges from the ebb and flow of commodity prices. After unloading some of its more attractive businesses (such as phosphate mines where the firm isn’t the middleman), it’s susceptible to more ebb than flow.
That tenuous grasp on profitability means that Bunge has to dig into its cash reserves to support its operations and its 1.7% dividend yield when profitability is lacking.
To be clear, Bunge isn’t burning cash in the traditional sense. By that I mean that BG does make money from an accrual accounting standpoint, and its cash burn rate is relatively small. But Bunge’s paper-thin margins at a time when soft commodities appear to be making a long-term top doesn’t bode well.
I wouldn’t own this stock right now.
Finally, there’s Nokia (NOK), the $10.45 billion handset maker that’s seen share prices fall by more than 40% since the first trading session of 2012. In the last decade and change, the Finnish firm has gone from being a global innovator in the cellular phone market to playing catch-up, and consumers have taken notice. Revenue is down more than 30% in the last three years, profits turned into losses, and the firm has been hoarding its war chest to stay afloat.
Luckily for Nokia, that’s a pretty big war chest. The firm currently holds more than $10 billion in cash and investments, offset by a debt position that eats around half of that balance sheet liquidity.
While that gives Nokia some margin of comfort, it’s not going to last long at the cash burn rate that the firm is currently seeing. That deteriorating balance sheet is a sort of positive feedback loop. As NOK sheds cash, its debt becomes riskier and pricier to service.
Investors are counting on a safety net from Microsoft (MSFT). With the firms’ partnership already scoring Nokia a $1 billion annual payout from Redmond in exchange for using the Windows Phone OS, there’s a precedent for a deal between the two – especially after Google’s (GOOG) Motorola Mobility purchase. But Microsoft has already been in the handset business to less than stellar effect, so while MSFT may lend support to Nokia, I think it’s unlikely they’ll make a lucrative bid for shareholders.
I’d recommend exiting Nokia before this firm depletes more cash from its balance sheet.
To see these cash burners in action, check out the Cash Burner Stocks 2012 portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.