As I was reviewing some of my articles and picks from the past few years, I came across my article from late December 2013, titled Cheap is Not Enough. I looked at three stocks that were, at the time, the subject of a debate about their turnaround potential in 2014. I used Piotroksi F-scores and Altman Z-scores to evaluate the chance of J. C. Penney (JCP), Molycorp (MCP), and Navistar (NAV) staging a recovery in 2014. I concluded that there was very little chance of that happening. As is often the case, the number called the tune, and all three stocks finished 2014 solidly in the red.
I broke these tools out again this morning to measure the financial strength and prospects of some of this year's takeover speculations. One stock that had received a lot of attention as the potential great turnaround or real estate play is Sears (SHLD). I have never bought into this thesis, as a trip into either a Sears or a K-Mart makes it quite clear that both are franchises in decline. There is no makeover or fix that will resurrect either brand, in my opinion.
As far as spinning off Sears' real estate into a REIT to unlock value, stop for a minute and think about where Sears' free-standing stores are located. It is usually not in the best mall or plaza in town. It is not a collection of premium real estate, by any stretch of the imagination. I think the window to do a successful REIT had closed a few years back.
The numbers are on my side so far. The Piotroksi F-score for Sears is 1, on the point rating scale. Prospects are poor and financials are not improving for the retailer. The Altman Z-score is just 1.8, so Sears' financial condition is somewhat marginal right now. This looks like another potential turnaround that doesn't make the grade.
There is a lot of excitement about shares of T-Mobile (TMUS), as we start the year. I confess that I was interested in the stock as well. We shifted our cell phone plan around at year-end, and the unlimited deal at T- Mobile was the best value in our opinion, and we left Verizon (VZ) in favor of the smaller carrier. I think that there will eventually be some consolidation in the industry, but we are still a few years and an election away from any chance of a deal involving Sprint (S) and T- Mobile getting regulatory approval.
In the meantime, this is a very competitive industry, and the numbers say that a turnaround in the stock Is not yet in the cards. The company is heavily leveraged and gets a Z-score of just 0.44. The F-score is a 4, so financial conditions and prospects have not yet begun to improve enough to make the stock a worthwhile speculation.
The only way to substantial improvement in shares of Elizabeth Arden (RDEN) in 2015 is if someone steps up and takes the company private. The company is unprofitable, and sales are still falling. The company is cutting costs and taking all the usual fixer-up steps, but there are no signs these measures will work. The balance sheet is not horrible, but debt levels are still higher than I like to see. The numbers pretty much agree with me: Elizabeth Arden earns a Z-score of just 1.58, and the F-score of 3 indicates that the stock is likely to lag the market over the next year.
Over the years, at various times, I have owned just about every level of the capital structure of Carmike Cinema (CKEC). I like the company and think that owning small-town theatres is a good business, and the digital and 3D first-run cinemas are a nice compliment to the core operations. However, the movie business is just sort of ho-hum right now, and the schedule doesn't look like there are any savior type films on the horizon. I also suspect that the progress of on-demand movies has changed the movie-viewing habits of a lot of people. I, for one, prefer to watch movies at home, without the $12 super size box of Junior Mints. The numbers agree: Carmike Cinemas earns an F-score of just 3, and the Z-score is just 1.33.
No one loves a good turnaround as much as I do, but the numbers have to support the script, before I can buy the story.