I took a look at BTU and believe a certain amount of caution is warranted. Debt to equity is .97, which strikes me as absurdly high for any company reporting enough profits to rate a low PE, especially right after taking in close to half a billion dollars in an IPO.
I've never owned Apple Computer, but I do tend to think of their balance sheet as the ultimate benchmark for what a profitable company's balance sheet should look like. Very low debt to equity (just enough credit to run the business), and high cash balances with cash making up a large percentage of book value. That SHOULD be the pattern for ANY company that is honestly profitable, although probably not to the extreme of Apple.
By now there should be at least some awareness that GAAP, though perfectly legal, doesn't reflect a company's true financial condition in all cases. Abuse of GAAP shows up as high book values, low PEs, high debt levels, negative cash flow and low levels of cash. What it basically comes down to is very large operating expenses are not being expensed at the rate they are incurred. The result is earnings are artificially inflated, causing a low PE and a large accumulation of unrealized losses showing up as book value.
In a bull market the analysts love these kind of companies. They can hype the "earnings" to anyone who will listen, and no matter what the consensus is, they always come in on target. It's also a safe bet that the underwriters of a recent stock offering will carry "buy" ratings on the company. In a bear market, at the beginning of a witch hunt for accounting abuse, my view is these type of issues would be fantastically dangerous to own. At least it seems to me it would be somewhat unpleasant to wake up and find a favorite stock the subject of headline news in the Wall Street Journal for questionable accounting practices.
Out of curiousity I recently ran a screen for companies with a debt to equity ratio over .9 and a PE of less than 100, the result was 897 matches, or roughly 1 out of every 10 stocks in the database. The scary part is those are likely to be some of the most widely held and widely covered of Wall Street's darlings.
IMO, the sole cause of the current recession was the implementation of SAB 101. SAB 101 eliminated the practice of shipping inventory to channel partners and counting it as revenue before it was sold through the value added resellers to end users. Over a year has passed since SAB 101 went into effect and manufactures are still trying to work off the past accumulated inventory build up caused by over supplying channel partners. As I see it, SAB 101 was a walk in the park compared to what will be required to reform the abuse currently allowed by GAAP. It will take years to correct and I believe before everything is said and done that virtually every public company will be affected by the fall out, even those that don't deserve it. Somewhere down the line I suspect there will be some wonderful bargains, but in the mean time cash is probably the best value play out there.
I only see two choices: 1. Try to sweep Enron under the rug and accept a market no one will ever fully trust, or 2. bite the bullet, accept the damage, and make the changes necessary to pave an eventual recovery from a lower level. My guess is a somewhat compromised version of number two will be the outcome, with a bear market that will last for at least 2 to 4 more years. If I were feeling even a little bit less bearish, I'd probably be screening for value plays with debt to equity under .2, but I don't think we're anywhere near the bottom and I don't want to loose a bunch of fingers trying to catch a falling knife.
Disclaimer: One man's opinion subject to change without notice. |
