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Five More Stocks with Zero Value

We'd prefer a pack of gum to these businesses.

Matthew Coffina, 12/16/2008

Last month we highlighted five stocks, each with a fair value that we estimated at a nice, round "zero." Since then, zero-dollar fair value estimates have experienced a virtual renaissance, with the total number of such calls more than doubling to 32. I thought this phenomenon merited a second look, so this month, we present five more stocks that look completely worthless to Morningstar's team of analysts.

Before diving into this month's picks, there are two things I'd like to address. Last time, an adoring fan sent me an e-mail to express just how valuable he found my article--about as valuable as the featured stocks. He had a valid point though. So what if we think these stocks are worthless? What are you, as an investor, supposed to do about it?

Well, we probably wouldn't recommend shorting these stocks. In many cases, the share prices have already fallen near zero, leaving little upside and potentially infinite downside. Also, put options are rarely available at a strike price that would make them worthwhile.

As with most of our 1-star calls, the primary intended audience is the company's existing shareholders. After all, if you can sell something worth $0 for 50 cents, you're getting a terrific deal. Besides, our primary goal in generating fair value estimates is to be as accurate as possible given the available information. If we think a stock is worthless, there's no point in saying otherwise.

I'd also like to emphasize the perils of making $0 fair value calls. We published an in mid-2005 featuring six companies that had zero-dollar fair value estimates at the time. While Delphi Automotive and Delta Airlines DAL did in fact go bankrupt, several of the other firms survived, and even thrived for a time. The Great A&P Tea Company GAP rose from around $6 to above $35 per share, before collapsing to below $5. Elan Corp. ELN rallied from around $3 all the way up to about $35, before collapsing earlier this year to the midsingle digits. AK Steel Holding AKS saw its stock rocket up from below $7 to more than $70. It has now returned to the high-single digits.

The point is that even $0 fair value calls are far from a sure thing. All five of the stocks we highlight below carry our very high fair value uncertainty rating. Companies currently flirting with bankruptcy generally have a high degree of financial and/or operating leverage. While that has pushed them to the edge of a cliff in the current downturn, conditions could improve in a way we don't expect, drastically changing the fortunes of these companies.

The best we can do is estimate what these businesses are worth, given what we know now. We think equity holders in the following companies would be better off investing in dinner and a movie, as a break from this wretched economy.PAGEBREAK

Fannie Mae FNM
From the Analyst Report: "Fannie Mae sits at the intersection of extreme financial leverage and the troubled U.S. housing market. With mounting losses chewing through its slim capital base, this mortgage giant was placed in conservatorship and is now controlled by its newly empowered regulator."

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