What Are Zombie Stocks? Zombie stocks might sound scary. You will probably think they’re even scarier once you know what they are.
Despite their potential to eat your investment dollars – much like horror movie zombies like to eat brains – befriending the right zombie stocks could add significant opportunities to your portfolio.
What Companies Are Zombie Companies?
Zombie companies do not have enough money to pay off their debt, but they have enough revenues to keep operating while servicing their debt obligations. You can think of them as households that only pay the minimum balance on their credit cards as they struggle to make ends meet. They’re not starving or homeless. They just aren’t going anywhere.
Investors should take heed when they consider buying zombie stocks. Since the companies don’t have any excess capital, it’s unlikely that they will experience the financial growth needed to increase their share price levels.
On the other hand, some zombie companies have been called “too big to fail.” The government has a history of bailing these companies out when they get into financial trouble. The bailout isn’t always good for stock prices, but at least it prevents prices from reaching zero and it helps to keep people employed.
How Do You Identify a Zombie Company?
Experts find that about 18% of companies listed in the Bloomberg Total Return Index probably count as zombie companies. With that many scary investments out there, you need to know how to identify the walking dead.
Before you invest in a company, look for signs like:
- Debt that grows from year to year.
- Long research and development periods before releasing products.
- Relying on capital from outside investors instead of generating revenues.
You should be able to find this information in a company’s financial statement. Publicly traded companies must release reports that show how they perform. You can typically find their reports online.
What Is An Example of A Zombie Company?
There are a lot of zombie companies out there. Bed, Bath & Beyond (BBBY) stands out as one most investors should stay away from. Why is it such a perilous zombie company?
Some of its biggest problems include:
- Share values that have been falling steadily for nearly a decade.
- Locations in or near malls, which have not performed well for several years.
- Desperate attempts to lower overhead by closing about 200 retail stores.
- Negative operating profits.
- More than $4 billion in debt.
- Increased competition from smaller and online sellers.
Bed, Bath & Beyond had a chance to turn itself around when Mark Tritton became CEO in November of 2020. Unfortunately for the store and its shareholders, the COVID-19 pandemic ruined those plans.
Bed, Bath & Beyond could well limp along on one leg slowly before it finally crumbles like so many other brick and mortar stores. Right now, though, it has the hallmarks of being a zombie company doing its best to pretend it can still live a normal life.
Is Uber a Zombie Company?
Uber’s stock had has done better than expected in 2021. It still has a lot of features that make it look like a zombie company, though.
Uber’s biggest problem is that it cannot seem to earn a profit. In fact, it doesn’t even come close. The company lost $8.51 billion in 2019 and $6.77 billion in 2020. (Uber says it doesn’t lose nearly as much money. Even by its account, though, it lost $2.73 billion in 2019 and $2.53 billion in 2020.)
You might stop to protest that Uber has enormous potential since it has few competitors and demand for its service will probably increase over the next decade.
Those are valid points. Uber might turn into a profitable company. Right now, though, it’s a zombie. Some zombies manage to find the miracle cure that makes them impressive.
Is Ford a Zombie Company?
A few investment experts have labeled Ford as a zombie company. They have realistic reasons, including:
- A 3% sales growth in 2020.
- A three-year sales grow under 3%.
- In 2020, Ford didn’t have enough pretax earnings to cover double its debt interest.
- Lots and lots of debt
The slow three-year sales growth is concerning. The rest seems a little suspicious. The pandemic certainly turned plenty of healthy companies into zombies. Some of those companies will never recover. It would take a significant change in consumer behavior, though, for Ford to become the walking dead.
Right now, Ford has a fever. Keep an eye on it, but don’t jab its brain until you see whether it rebounds after the pandemic.
Is Japan A Zombie Economy?
Japan famously had a zombie economy in the 1990s. During the decade, Japanese banks continued pumping money into failing – and failed – companies. Some of the companies received government support because they were “too big to fail.”
Today, it’s unfair to say that Japan has a zombie economy. It certainly has some zombie companies, but so do the U.S. and other countries.
Should You Ever Buy Zombie Stocks?
Buying zombie stocks can generate enormous returns… but this doesn’t happen often.
For example, a company that makes vaccines might spend a decade perfecting its work and passing tests. If the vaccine makes money, the stock value could grow quickly. If the work leads to a dead end, though, you and other investors could lose everything.
If you choose to buy zombie stocks, do plenty of research, make educated decisions, and never risk money you cannot afford to lose.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.