Not Worth the Paper They're Printed On

Sunday, December 21, 2008

Morningstar tried to put it delicately and hedged enough to say things could change, improving the companies' fortunes, but in the end there was no polite way out: "If we think a stock is worthless, there's no point in saying otherwise," the investment research company said in a recent report.

The company presented five stocks that its team of analysts deemed to have a fair value of zero. Morningstar stock analyst Matthew Coffina pointed out that the company made similar calls on several stocks in mid-2005, with mixed results. Back then, two companies whose stocks it targeted, Delphi and Delta Air Lines, filed for bankruptcy protection. Three others, Great Atlantic and Pacific Tea, Elan and AK Steel, soared afterward before plummeting again. "I'd ... like to emphasize the perils of making $0 fair value calls," he writes.

That said, he also says it's important to point out that if shareholders can sell what Morningstar deems a worthless stock now for, say, 50 cents, they have gotten themselves a good deal. In introducing the worthless stocks, Coffina said, "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."

Fannie Mae: Snared in the vise of excessive financial leverage and the crippled housing market and mounting losses eating away at its meager capital base.

Sirius XM Radio: Crushing debt burden, slowing subscriber growth, debt coming due.

Forest City Enterprises: Severe financial distress, slowing operating cash flow, may need to refinance debt at high rates.

Trump Entertainment Resorts: Planning to forgo payment of nearly $60 million in interest due to lenders, which could have serious ramifications.

Valassis Communications: Tough advertising environment, troubling debt load.

-- Steven Levingston

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