Warning Signs That Companies Are in Big Trouble
by Charles Rotblut | April 13, 2023
Featured Tickers:
BBBY
SIVBQ
TUP
Yesterday, The Wall Street Journal discussed the high volume of trading incurring in Bed Bath & Beyond Inc. 
(BBBY). The newspaper attributed the activity to “retail investors’ interest” in the beleaguered retailer.
Bed Bath & Beyond is one of the so-called meme stocks, so it is possible these meme investors are staying active in the stock. This said, Bed Bath & Beyond was not listed among the most mentioned stocks in Reddit’s Wall Street Bets forum yesterday.
At the same time, Tupperware Brands Corp. (TUP) finds itself in hot water with its creditors. In a press release issued last week, Tupperware Brands concluded that there is “substantial doubt about its ability to continue as a going concern.”
Since April is Financial Capability Month, let’s talk about warning signs of financial distress and bankruptcy.
I’ll start with a very simple but too often overlooked basic fact: shareholders are owners. When a company is seized by its creditors or otherwise goes into bankruptcy, common shareholders are last in line. Bondholders and creditors have first dibs on assets (often with tiers of who has priority), followed by any preferred shareholders and then, if anything is left over, common shareholders.
Bluntly put, buying shares of a company on the verge of going bankrupt is a gamble—not a smart bet at that. You could easily lose every dollar you used to pay for the stock.
Bed Bath & Beyond’s troubles have been known for years. Its revenues have plunged from $12.3 billion in fiscal 2018 to $6.2 billion for the 12-month period ending November 2022. The homewares retailer hasn’t been profitable since fiscal 2018. Cash flow from operating activities—a measure of how much cash flow normal business operations are realizing or burning through—has been negative during five out of the last seven reported quarters. Reported cash was just $153.5 million as of November 2022 versus $1.4 billion in February 2021.
Clearly, there were warning signs that the company was struggling.
Bed Bath & Beyond has been selling shares to raise liquidity in an attempt to survive. The capital action has increased the number of shares outstanding from 90.7 million in late November 2022 to 428.1 million as of three weeks ago. Put another way, the ownership each share represents has been diluted by a factor of almost five. Ouch!
Tupperware Brands has also experienced a big drop in revenues, from $2.3 billion in 2017 to $1.3 billion for the 12-month period ended November 2022. Cash flow from operating activities has been negative for the last three quarters.
The bigger warning sign that Tupperware Brands was spoiling came when the company announced its third-quarter earnings in November 2022. “It is probable that [we] will not be able to maintain compliance with the covenants in [our] credit agreement … which raises substantial doubt about [our] ability to continue as a going concern,” said the company in a section labeled “Liquidity and Balance Sheet.”
Anytime you see the phrase “going concern” used—especially in a cautious manner—walk … make that run … away. Fundamentally sound companies do not raise concerns about their ability to stay in business.
Let’s say you hold on to a stock until the very end, or an adverse development occurs too quickly for you to be able to get out in time—such was the case with SVB Financial Group (SIVBQ), the parent company of Silicon Valley Bank. What are your options? As long as there is a market for the security, you must sell if you want to claim a loss on your taxes. This is assuming, of course, you are holding the stock in a taxable account. You can’t claim losses on an individual retirement account (IRA) or a Roth IRA.
Only when there is no consideration for the stock can you treat the stock as being worthless for tax purposes. This most typically occurs after bankruptcy has been completed and the shares have been eliminated. You may be able to have your broker write an abandonment letter, but it is much easier to just sell the stock even if all you are receiving in exchange are pennies for each share sold.
Of course, the best strategy is to monitor the companies you are investing in—especially the cash flow statement—and be prepared to sell if the underlying fundamentals deteriorate.
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AAII Sentiment Survey
Pessimism among individual investors has slightly decreased but remains above average for the eighth consecutive week in the latest AAII Sentiment Survey. Neutral sentiment jumped, while optimism declined.
Bullish sentiment, expectations that stock prices will rise over the next six months, plunged 7.2 percentage points to 26.1%. After moving closer to its average last week, optimism has pulled back to an unusually low level. Bullish sentiment remains below its historical average of 37.5% for the 71st time out of the past 73 weeks.
Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rose 7.9 percentage points to 39.5%. Neutral sentiment is above its historical average for the 14th time out of the past 15 weeks.
Bearish sentiment, expectations that stock prices will fall over the next six months, decreased 0.5 percentage points to 34.5%. After a stretch of being unusually high, pessimism has been reverting closer to its average. However, bearish sentiment is still above its historical average of 31.0% for the 68th time out of the past 73 weeks.
The bull-bear spread (bullish minus bearish sentiment) decreased 6.7 percentage points to –8.4%. This puts the bull-bear spread back at an unusually low level.
With inflation down to 5%, the economic climate could be viewed as being on the rise. Market volatility has been a concern for individual investors.
Though individual investors mostly approved of the latest interest rate hike being smaller, inflation, market volatility and the pace of economic growth continue to influence individual investors’ short-term outlook for stocks.
This week’s special question asked AAII members how they would describe the current state of the economy. Here are their responses:
- Lousy: 18.5%
- Mixed: 64.2%
- Good: 15.0%
- Great: 0.4%
- Not sure/no opinion: 2.0%
Bullish: 26.1%, down 7.3 points
Neutral: 39.5%, up 7.8 points
Bearish: 34.5%, down 0.5 points
Bullish: 37.5%
Neutral: 31.5%
Bearish: 31.0%
See more Sentiment Survey results.
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Discussion
Kevin from NC posted over 3 years ago:
I had a small stock position which was in my IRA go bankrupt. A few months later I received a class action settlement for the stock. I think I could have just cashed the check and been ok (tax wise), but I deposited it back into my IRA even though it pushed me over the annual contribution limit. I just included a note with my 1040 that it was a settlement on a bankrupt stock in my IRA. Not sure all that was legit but IRS never complained, so.....
Michael Daillak, CPA-Retired from CA posted over 3 years ago:
“The best strategy … to monitor the companies you are investing in” is to review the “Statement of Shareholders Equity”. It provides a three-year summary of how much of the earnings – which were initially additions to Equity – have actually been removed by payouts from Cash for dividends and stock buybacks, and how much, if any, are still left in the corporation. For the importance of this factor regarding BBBY see the Allan Sloan article at this link: https://finance.yahoo.com/news/bed-bath-beyond-how-stock-buybacks-undermined-the-company-154202427.html Mr. Sloan’s January 11, 2023 (3 min read), article made very clear what BBBY’s problem was: “A major reason the company is so messed up is that when it comes to its own stock, the company violated a key rule of retailing — buy cheap. Would you believe that Bed and Bath has spent more than $11.7 billion to buy back almost three quarters of its own stock? At an average cost about 15 times the stock’s current price? And that only a couple of months ago, when it was already in desperate financial shape, it kept buying back its shares?”
Michael Daillak, CPA-Retired from CA posted over 3 years ago:
Stock buybacks are the equivalent of a “SPECIAL DIVIDEND FOR ONLY A FEW VERY LARGE STOCKHOLDERS” - perhaps shareholders whose large number of approval share-votes management needed for their proposed compensation packages to pass at the Annual Proxy voting. Increasingly the total annual Cash paid out for stock buybacks for a few shareholders, exceeds the total annual Cash paid out for dividends for all shareholders. See the Consolidated Statements of Shareholders’ Equity in PG’s (The Proctor & Gamble Company) most recent audited financial statements for the Fiscal Year Ended June 30, 2022.
Michael Daillak, CPA-Retired from CA posted over 3 years ago:
Over the past three fiscal years PG has paid out all of its remaining profits (after the payment of $ 24.9 billion as dividends to all shareholders) to just a few shareholders in $ 28.4 billion of stock buybacks. This information is set forth in the Consolidated Statements of Shareholders’ Equity in PG’s most recent audited financial statements for the Fiscal Year Ended June 30, 2022. In other words, PG’s total Equity of $ 47.6 billion at June 30, 2019 was reduced to $ 46.9 billion as of June 30, 2022 – even though its total profits added to Equity over the three years totaled $ 42.3 billion!
Michael Daillak, CPA-Retired from CA posted over 3 years ago:
Had the cash to purchase the $ 28.4 billion in stock buybacks come out of “Mr. Market’s” bank accounts, instead of PG’s, PG’s Equity, which is owned by all its stockholders, would be larger by that $ 28.4 billion! And, $ 28.4 billion in additional Cash would be currently available: to pay proportionately to all stockholders as special dividends; or to pay amounts that are outstanding (i.e., currently-unpaid) liabilities; or to still have as excess cash-equivalent investments for protection against future unforeseen financial adversities.
Michael Daillak, CPA-Retired from CA posted over 3 years ago:
Obviously, PG’s management and B of D, has been acting for years as if they have no Fiduciary liability to the remaining shareholders of PG’s common stock – so, in PG’s case, the concept of “accountability to shareholders” is a myth – which causes one to ask themselves: where is the SEC, and where are all the class-action lawyers? Because, if I were to hazard a guess, I would guess that more-than-likely, those same few, BUT VERY LARGE stockholders who benefited from those stock buybacks, voted favorably for the compensation packages of PG’s management and B of D.
Michael Daillak, CPA-Retired from CA posted over 3 years ago:
I’ll stop here, and not bore you with info about PG’s most recent audit reflecting a “critical finding” concerning PG’s valuations of its intangible assets (e.g., Goodwill, Intellectual Properties, etc.) which possibly resulted in a $ 7 billion write-down – and the fact if intangible assets are excluded, PG’s Equity would be negative (i.e., a deficit), and that all the currently remaining PG stockholders possibly only own a share of net liabilities, which means in a bankruptcy (like that facing BBBY shareholders), their PG stock would be worth nothing! And this isn't just a PG problem. Currently, approximately, 40% of the companies in the S&P 500 have a negative (i.e., a deficit) net Equity if intangible assets are excluded - a very easy screen if you have AAII's SI Pro.
Barry from TX posted over 3 years ago:
Thanks, Charles, for a reminder that stocks teetering near bankruptcy are perilous investments. Before AAII educated me -- thanks again for that. too -- about 15 years ago, I bought $16,000 of Circuit City stock when it had dropped to about $1 per share because I read that a famous "shareholder activist and corporate raider" was going to buy it and revive it. It tanked soon. I was able to sell it at $0.25 per share. I lost $12,000 of the $60,000 total I had in the market at that time in less than two weeks. I learned "not to catch a falling knife" the hard way.
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