Overvalued at Any Price

Although the market has been looking up over the past several weeks, a rising tide can't lift your boat if it's sprung a leak. Bear markets can be trying times for all sort of firms, but those that were facing company-specific risks or that were already grappling with secular headwinds may struggle mightily. In cases where we think these firms are facing virtually insurmountable odds, our analysts will assign the stocks a $0 fair value estimate--which results in an automatic 1-star rating.

In plain English, such a rating translates to "Consider Selling," so current shareholders of these firms at least know where we stand. But what should other investors make of a $0 fair value estimate? First, it's important to note that many of these firms have valuable assets, and they may continue to operate in some form even after a bankruptcy filing--but large debt loads mean that common stakeholders will likely be left with nothing.

Despite the negative outlook, we wouldn't recommend shorting these stocks, as Morningstar analyst Matt Coffina pointed out in a related article in December. In many cases, the share prices have already fallen near zero, leaving little upside and potentially infinite downside. And put options are rarely available at a strike price that would make them worthwhile.

However, we do believe investors (even those who don't currently own the shares) can glean insights from such situations by studying the secular, economic, operational, and competitive factors that so darkened the outlook for these companies. You can dig into the stories by reading the Morningstar Stock Analyst Reports for each firm, which are available to Morningstar.com Premium Members. (If you're not a Premium Member, give us a try free for 14 days.)

As of June 5, our screen returned 22 stocks with a $0 fair value estimate. You can learn more about four of them below, and click here to see the  most current list.

 Altus Pharmaceuticals 
Price: $0.36 | Fair Value Estimate: $0 | Moat: None | Uncertainty: Very High
From the  Analyst Report:
With one drug a failure and the other a long way from commercialization, Altus' thin pipeline does not appear to contain any promising candidates in earlier stages of development. Furthermore, with no products on the market and profitability a long way off, the firm continues to burn through cash.

 Fannie Mae  (FNM)
Price: $0.70 | Fair Value Estimate: $0 | Moat: None | Uncertainty: Very High
From the  Analyst Report:
We think Fannie Mae lacks a viable capital structure for such a large and critical financial firm, and we suspect that the government will be forced to act sooner rather than later, perhaps more immediately by converting its preferred investment into common (merely acknowledging economic reality), or as Congress is forced to work out a more sustainable long-term solution. We think any such solution is highly likely to wipe out pre-conservatorship common and preferred equityholders. Any other outcome would be a gift from the taxpayers' purse.

 Gray Television (GTN)
Price: $0.70 | Fair Value Estimate: $0 | Moat: None | Uncertainty: High
From the  Analyst Report:
Gray's broadcast television business benefits from its relationships with major TV networks such as  CBS (CBS) and NBC (GE). In our opinion, the compensation Gray receives from the major networks will likely be reduced or eliminated in the future, as new technology continues to make traditional broadcasters less of a necessity for reaching large audiences. We think this will lead to contracting operating profit margins, but the company's debt situation is our biggest concern. In pursuit of growth, Gray has taken on significant debt to acquire television stations. We believe the company overpaid for several assets and will struggle to comply with covenants on its heavy debt load. Gray has been forced to put almost all of its free cash flow toward debt repayment, and cost-cutting will be difficult for the broadcaster as its transition to digital and high-definition (HD) offerings has increased operating costs for an already high fixed cost operation. We think equity shareholders face a high probability of losing their entire investment.

 Trans World Entertainment (TWMC)
Price: $1.04 | Fair Value Estimate: $0 | Moat: None | Uncertainty: Very High
From the  Analyst Report:
In today's fiercely competitive retail environment, pure-play music and video retailers like Trans World Entertainment are facing an uphill battle, and we think the long-term outlook for this company is grim. In its current form, Trans World is a no-moat company with minimal prospects of generating sales growth or positive earnings. Sales are steadily falling, losses are accelerating, and the firm continues to burn through cash. We don't think this firm will exist in its current form five years from now.