{"id":9763,"date":"2020-04-21T10:39:02","date_gmt":"2020-04-21T14:39:02","guid":{"rendered":"http:\/\/staging-prblog.paladinregistry.com\/blog\/?p=9763"},"modified":"2020-06-01T02:37:30","modified_gmt":"2020-06-01T06:37:30","slug":"taking-sick-stocks-temperature","status":"publish","type":"post","link":"https:\/\/www.paladinregistry.com\/blog\/investing\/taking-sick-stocks-temperature\/","title":{"rendered":"Taking Sick Stocks\u2019 Temperature"},"content":{"rendered":"

As you\u2019ve surely noticed by now, I\u2019m confident about the long term strength in the economy, even if the short term outlook is virtually unknowable. But as much as I believe in the economy, it\u2019s na\u00efve to think every stock will survive this crisis and go on to make that hoped for V-shaped recovery. Some companies will be permanently impaired. Others will need to merge. But some may be terrifically undervalued\u2014the babies thrown out with the bathwater, if you will. Those will be the stocks we\u2019ll all wish we had the foresight to buy someday.<\/p>\n

Assessing a Stock\u2019s Resilience<\/strong><\/h2>\n

There\u2019s no one surefire way to assess a stock\u2019s health and resilience. Distressed companies need to be analyzed differently from thriving companies. Thriving companies are valued according to their expected future cash flows. When companies are distressed, analysts first want to know if they can avoid bankruptcy or, if not, what their liquidation values might be. Only then should they think about upside. Here are a few considerations for companies that are taking it on the chin from this pandemic.<\/p>\n

Evaluating a Company\u2019s Earnings<\/strong><\/h2>\n

Earnings are a barometer of changes in shareholder wealth, but they aren\u2019t cash. Earnings include sales that were made even if payment wasn\u2019t yet received, for example. They can also include expenses that haven\u2019t been paid out yet. When times are tough, cash is king. For that, investors will want to look at the statements of cash flow, which reflect money that flowed in and out of the company. Companies need cash to pay interest on the debt they owe and the expenses they generate. If a company is burning cash, then the company might not be able to sustain a dividend or worse.<\/p>\n

Studying a Company\u2019s Balance Sheet<\/strong><\/h2>\n

The next stop might be the firm\u2019s balance sheet. Does the firm have enough cash and cash equivalents to sustain operations, and for how long? If not, some companies have emergency credit lines they can tap. In healthier times, firms could issue bonds and refinance their debt. That might not be the case now. While looking at the balance sheet, compare current liabilities with cash and equivalents. Those are the bills that will come due in a year or less. If the company\u2019s revenue has plunged, can the firm make those payments? In more stable times, we\u2019d compare current liabilities to current assets, but current assets include accounts receivable. A firm\u2019s customers might be slow payers, and that can lead to a cash crunch.<\/p>\n

The government, particularly the Federal Reserve, is pumping cash into the system through bailouts, stimulus payments and even buying troubled debt. That will prevent many companies from going under. But it can\u2019t shield all of them. Monitoring your holdings\u2019 cash positions and \u201cburn rate\u201d if they are currently losing money, is a wise step to take. And then, once you\u2019ve taken whatever steps necessary to manage your downside risks, then it will be time to look for the upside once again.<\/p>\n","protected":false},"excerpt":{"rendered":"

As you\u2019ve surely noticed by now, I\u2019m confident about the long term strength in the economy, even if the short term outlook is virtually unknowable. But as much as I believe in the economy, it\u2019s na\u00efve to think every stock will survive this crisis and go on to make that hoped for V-shaped recovery. Some companies will be permanently impaired. Others will need to merge. But some may be terrifically<\/p>\n","protected":false},"author":117,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":true,"template":"","format":"standard","meta":{"footnotes":""},"categories":[395],"tags":[],"class_list":["post-9763","post","type-post","status-publish","format-standard","hentry","category-investing"],"yoast_head":"\nTaking Sick Stocks\u2019 Temperature<\/title>\n<meta name=\"description\" content=\"Being confident about the long term strength in the economy, even if the short term outlook is virtually unknowable is fine, but it\u2019s na\u00efve to think every stock will survive this crisis and go on to make that hoped for V-shaped recovery.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.paladinregistry.com\/blog\/investing\/taking-sick-stocks-temperature\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Taking Sick Stocks\u2019 Temperature\" \/>\n<meta property=\"og:description\" content=\"Being confident about the long term strength in the economy, even if the short term outlook is virtually unknowable is fine, but it\u2019s na\u00efve to think every stock will survive this crisis and go on to make that hoped for V-shaped recovery.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.paladinregistry.com\/blog\/investing\/taking-sick-stocks-temperature\/\" \/>\n<meta property=\"og:site_name\" content=\"Paladin Registry Blog\" \/>\n<meta property=\"article:published_time\" content=\"2020-04-21T14:39:02+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2020-06-01T06:37:30+00:00\" \/>\n<meta name=\"author\" content=\"Evan R. 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