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Strategies & Market Trends : John Pitera's Market Laboratory

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To: OX who wrote (3259)	2/14/2001 8:15:35 PM
From: John Pitera	Read Replies (1) of 33421

Cramer has a nice little piece showing that it helps to be able to read a balance sheet: Heave a Sigh for PsiNet and Those Who Can't Read a Balance Sheet By James J. Cramer 2/14/01 11:21 AM ET One of the terrible things that happened during this period where we all lost discipline is that we forgot that the capital structure of a company is the single biggest determinant when you are analyzing turnarounds. For example, not that long ago a rival Web site for amateur investors recommended that people go long PSINet (PSIX:Nasdaq - news - boards), in part because it has an excellent networks division. I suggested you sell the stock after it hit 4,because when I looked at the capital structure I knew that PSINet didn't have enough money to make it. The company was too starved of cash to survive. Today the Financial Times reports that PSINet is about to sell its transaction networking solutions business in a bid to stave off bankruptcy. This is PSINet's highest-margin business. It's the classic thing that troubled companies do when they are really desperate: They sell the good stuff! They have to do this because of all of the debt that PSINet has. Of course, PSINet can't get anywhere near what the darned thing is really worth, because it is so cash-strapped. The article doesn't say that PSIX will give the division away, but it sure does suggest it. Anybody looking at the equity of PSIX, or anyone not understanding the way debt works, might have recommended buying PSIX. Anybody who could read a balance sheet would have taken the other side of the trade. The stock is now a buck and a half. Random musings: Lots of people giving up on stocks today. Again necessary if we are ever going to get a definitive bottom. CNBC's Bob Pisani flags the big blocks in Lucent (LU:NYSE - news - boards). Man, is that one getting ugly. Lucent's big enough that if it gets any worse there it could be like Orange County in 1994!

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