Just a couple weeks after writing on my past investing sins, a perfect example of those sins presented itself. Today, we share a little of what not to do. Both the set-up and outcome looked familiar to some of my past sins and it’s appropriate to highlight what is now the obvious.
Picture this …. Dean Foods (DF) was expected to announce earnings before the market opened this week. And instead of earnings, news comes that they have field for bankruptcy and the stock has been halted. Good morning, America!
It slays me that the good people working for the company (and investors) are going to struggle. About 15,000 employees woke-up wondering about their pension, health insurance, and job. I hope they have an emergency fund to fall back on. I’m also hoping those employees have been living within their means and don’t have significant debt or other obligations to satisfy.
The goal today is to prevent anyone from investing into something like Dean Foods. Being a value investor doesn’t mean you invest in junk. Low priced doesn’t mean good value. When you are looking for the next stock, let’s make sure it doesn’t include a Dean Foods.
The “Analysts”
Before getting into the details, let’s see what our vaulted professional analysts thought of the company. They must have seen this coming, right? Seriously, these are the smart folks that manage money, guide investors, and crunch the numbers. Here’s a screen shot from the morning we learned of the bankruptcy.
In one month, we went from 34 analyst ratings to only 6 ratings. Where did the other 28 analyst ratings go? Did they just walk away silently in the night? Just 1 month ago, 8 analysts had a buy on this company and 15 had it as a hold. The insanity and irresponsibility to recommend Dean Foods as a buy or hold is ludicrous.
As you can tell, I’m not a fan of analysts. As a group, they are late to the party or just plain absent from any form of reasonable analysis that can help investors. Like anything else when you look at a company, it’s just one of several data points in your analysis. Use them with caution – they certainly didn’t help the people investing in Dean Foods!
The 30-Second Scan
Like most individual investors, we screen and scan many stocks. Just like an HR person that scan’s thousands of resumes, we will do a quick 30-second scan on stocks to see if we want to dig deeper. Using FINVIZ.com, let’s do a quick scan to see if we’d want to purchase Dean Foods.
In the snapshot, I’ve highlighted just a handful of items. Remember, this is a 30-second scan. You should see quickly from the metrics that this company is junk.
- $79M market capitalization with -$415M income – That should be enough to stop the scan. Of course, the $0.80 price was your red flag but even at $10 or $20, the income is horrible.
- 15% dividend – Can you say dividend cut or something worse (like a bankruptcy)?
- Debt and lots of it – Never a good combination with a low-priced stock
- Negative EPS in the past and expected moving forward
- Bad margins
For kicks and giggles, let’s say we have 15-seconds left in our 30-second scan and looked at headlines. I’ve highlighted just 5 items that should give you concern.
- July 26 – The company has replaced its CEO, which is not a good sign
- August 6 – Loss widens more than expected plus an accelerated decline in milk sales
- August 6 (again) – Anybody that blames their poor sales on people drinking too much water is doomed
- August 19 – The new CEO buys $81,000 in shares. He’s been on the job for 3 weeks and he buys $81,000 in new shares. That’s a fake move to build confidence. Heck, I wouldn’t be surprised if the company paid him a signing bonus of $81,000 and told him to use it to buy some shares.
- September 6 – They conclude their “strategic alternatives review” and decided to “go it alone.” That’s code for nobody wants to buy us and the banks aren’t working with us anymore.
There you are … in 30-seconds you should have discovered that Dean Foods was doomed. Honestly, I’m hoping this stock would have never made it past your stock screen. It never stood a chance to be a successful investment and we need to see it for what it is.
Does This Type of Stock Build Wealth?
Using my last article on Building Wealth Through Individual Stocks, let’s see if it passes that test:
- Don’t pay too much – Low priced ($0.80 for Dean Foods) doesn’t means it’s a good value. Junk is junk! The stock is worth zero/zilch/nadda but the market was still saying it was worth $0.80.
- Buy and hold (forever) – You can’t expect to buy and hold (forever) a piece of junk. You should be asking if Dean Foods will be around 20-30 years. After a 30-second scan of company metrics, it should be apparent that Dean Foods would be lucky to be around for 3 months.
- Best in breed – It’s an industry leader with horrible financials in a declining consumer segment
- Familiarity (strong brand) – It’s the milk industry and it’s hard to tell the difference between brands. Boring stocks (i.e. Colgate-Palmolive) can be good but this is different. This is a company blaming poor sales on people drinking too much water.
- Diversification – There are plenty of excellent consumer goods alternatives before you’d want to consider “diworsifying” into Dean Foods
- Preserve capital – Buying this company is the opposite of preserving capital. If you need a reminder, just read about my junk company purchases. My past investment sins are the reason I wanted to highlight Dean Foods … somebody bought it at the close the day before it announced its bankruptcy. I’m trying to keep that from being you.
- Receive dividends – Given everything you know about quality dividend growth companies, it’s critical to understand that Dean Foods dividend (15% yield) is in jeopardy
Buying Dean Foods is the opposite of building wealth. You’d be better off going to Las Vegas and placing your chips on the roulette wheel – your chance of success would be better there.
Summary
This article was written because I don’t want any of my readers to go down this path. I’ve been there and it’s painful. And I also know that many people bought this stock the day, week, month before it filed bankruptcy. Heck, there was over $5,000,000 trading this stock the day before it filed for bankruptcy. All the signs were there saying “Don’t Buy Me!” but several bought it anyway.
This long-term economic expansion will end one day. Interest rates will rise, and debt-filled junk companies will get crushed. And that’s assuming they last through the end of the economic expansion – Dean Foods didn’t last.
Finally, we only have ourselves to blame when we invest in or work at a company that has declared bankruptcy. As employees, we should be looking at our company just like we would an investment. I’m betting the employees are looking back in hindsight to see if they saw this coming. Trust me, the signs were there.
Good luck to those employees. I never like to see hard working American’s wake-up and wonder how they will pay their bills.
Thanks for reading!
Mr. TLR