Which Of The Stocks In Your Portfolio Will Go To Zero In 2023?

The stock market has experienced a significant correction in recent months, with many stocks trading down 95-99%. This has left many people concerned that their stock may go to zero, leading to significant losses. It’s understandable that investors and traders would be concerned about this situation. A correction of this magnitude can be unsettling, particularly if you have a significant portion of your assets invested in the stock market. One of the biggest questions on the minds of traders and investors, as we approach 2023, is whether their stocks will go to zero.

There are many stocks that are potentially at risk of bankruptcy and are frequently discussed on Seeking Alpha. I have observed that readers often underestimate the chances of their stocks going bankrupt, while writers may overestimate the likelihood of this occurring. Some stocks that are continuously mentioned as being at risk include fuboTV (FUBO), Jumia Technologies (JMIA), Carvana (CVNA), Bed Bath & Beyond (BBBY), Lyft, Inc. (LYFT), and Blue Apron (APRN), among others. There are plenty of other stocks that are likely listed under short ideas on this website.

In this article, we will explore the reasons behind the current market correction and discuss the circumstances under which a stock may go to zero. We will also examine the likelihood of this occurring in your stock. In addition, this article discusses the potential risk of bankruptcy for two specific companies, Carvana and Blue Apron.

Why Is The Stock Market Correcting Violently?

There have been several factors that have contributed to the market correction in 2022. One of the main reasons has been supply-chain issues, which have disrupted the production and distribution of goods and services, leading to shortages and price increases. The ongoing Russian invasion of Ukraine has also disrupted food supplies and contributed to inflation. In response to these factors, the Federal Reserve, led by Chairman Jerome Powell, decided to raise interest rates to record levels in an effort to curb inflation. While this may have been necessary to address rising prices, it has also had the unintended consequence of stifling economic growth and making it difficult for companies to borrow money at reasonable rates.

The combination of supply chain issues, inflation, and high-interest rates has had a negative impact on the financial performance of many companies, leading to a decline in their stock prices and contributing to the overall market correction.

One of the reasons that certain small and mid-cap stocks have corrected almost 90-95% is that many of these companies are not profitable and are burning through their cash reserves quarter after quarter at a high rate. This means that they are relying on external funding to stay in business.

In a booming market, it is often easier for these companies to borrow money at low-interest rates and to dilute their shares through the issuance of new stock, especially when stocks are trading at very generous valuations (where there is room for dilution). However, in a market with high-interest rates and depressed stock prices, these options are simply not an option.

As a result, these stocks are trading on the assumption that they will be able to secure additional funding once they run out of money within the next year. If they are unable to do so, there is a risk that the company could go bankrupt and the stock will likely become worthless.

It’s worth noting that during bankruptcy, a company does not necessarily close down. Instead, creditors may gain more equity in the company and shareholders may be wiped out. Eventually, the company may emerge from bankruptcy with stronger financials, but the original shareholders will no longer have any ownership. A good example of this is General Motors (GM), which wiped out shareholders and then did another initial public offering.

There is a reason why short sellers often target companies with high burn rates that are not profitable – these types of companies are always susceptible to imploding. There was a time when Amazon (AMZN) and Tesla (TSLA) were both targeted by short-sellers, who focused on Amazon’s huge losses and Tesla’s high cash burn rate. However, as we now know, these predictions turned out to be wrong. This illustrates that the tactic of short-selling is not always reliable.

What Are The Chances A Stock Goes to Zero?

The only circumstance under which a stock may go to zero is through bankruptcy. When a company files for bankruptcy, it is essentially seeking protection from its creditors while it restructures its debts or liquidates its assets. There are several different types of bankruptcy filings that a company can make, including Chapter 7, Chapter 11, and Chapter 13. If a company files for bankruptcy and is unable to restructure its debts or liquidate its assets in a way that allows it to pay off its creditors, its stock often becomes worthless.

There have been several instances of publicly traded companies filing for bankruptcy in 2022, including retail companies like Revlon and cryptocurrency companies like Core Scientific (CORZ). In addition, there has been an increase in the number of special purpose acquisition companies (SPACs) filing for bankruptcy in recent years.

Revlon, a well-known retail company that specializes in cosmetics and personal care products, filed for Chapter 11 bankruptcy due to the impact of the COVID-19 pandemic and significant debt.

Core Scientific, a publicly traded company involved in the cryptocurrency industry, filed for Chapter 11 bankruptcy due to market fluctuations and regulatory challenges.

SPACs, which are shell companies that raise money through an initial public offering with the intention of acquiring an existing private company, have also faced bankruptcy risk in recent years. Some SPACs have struggled to complete their acquisition or generate revenue, leading to bankruptcy filings.

In these examples above majority have resulted in the stock going to zero.

Here are a few factors to consider when assessing the risk of bankruptcy for a company:

1. Cash burn rate: Look for trends in the company’s cash burn rate from quarter to quarter. High cash burn rates can indicate financial distress and an increased risk of bankruptcy.

2. Management actions: Pay attention to what management says or does. If management continues to sell stock as it is trading around a 90-95% correction, it could be a sign that they do not have much faith in a rebound.

3. Market cap: Consider the company’s current market cap, as dilution (issuance of new shares) can reduce the market cap and lead to a decline in stock price.

4. Stock price: Keep an eye on the stock price, as stocks that trade below $1 on regulated exchanges for more than 30 days face the risk of delisting to the over-the-counter market, which can be the death of the stock. To avoid delisting, some companies may do a reverse share price merger to keep the stock above $1.

The key to understanding the bankruptcy of a particular stock is to pay attention to what management says and does. While management may not be truthful about the risk of bankruptcy until the very end, their actions and statements can provide clues about the company’s financial health. For example, if management is selling large amounts of stock or making other decisions that suggest they do not have confidence in the company’s future, it could be a sign of increased risk of bankruptcy especially when cash reserves are really low. So, insider selling at low levels, rather than buying, is one action that should raise the eyebrows of shareholders.

It is relatively rare for a large number of companies to go bankrupt at the same time, although this happened during the financial crisis of 2008. In most cases, companies with real value are able to find investors or get acquired by other companies or find creative ways to raise money and stay afloat.

On the other hand, companies that do not provide much value, are not leaders in their respective industries, and are not growing in key metrics such as revenue or user growth may be at higher risk of bankruptcy.

Two Stocks In Focus

In this section, we will discuss Carvana and Blue Apron, two stocks that are frequently mentioned as being at risk of bankruptcy. We will review recent news and provide an understanding of why people think these companies may be at risk. Our goal is to give readers a solid understanding of how to apply the concepts discussed in this article to assess the risk of bankruptcy for a specific stock.

Seeking Alpha offers useful tools for understanding the fundamental analysis of a company. Each quarter, a company releases its earnings and provides financial statements, including information on profit, margin, revenue, debt, and cash reserves. This information is crucial for understanding the risk of bankruptcy for a company and can be found in the “Ratings” section and the “Financial” tab on a stock quote. In addition, public companies are required to disclose risks that could affect the business and impact the stock. These disclosures, known as “Risk Factors,” are included in the company’s annual Form 10-K and can provide valuable insights that may be overlooked by others. This document is a good starting point for identifying potential risks that may not be immediately apparent.

As mentioned previously, we will be discussing two examples of stocks that are at high risk of bankruptcy. Carvana is one of the most well-known companies that is projected to file for bankruptcy. But are these claims well-founded? The stock is currently 99% off its all-time highs, which were just over a year ago, and its current market cap stands at $759 million. The company generates approximately $3.5 billion in revenue per quarter, which is likely to be significantly lower when they report in 2023. They have around $305 million in cash and $8 billion in debt, with a negative cash flow of around $188 million last quarter.

Given these numbers, it is easy to see why Carvana is at high risk of bankruptcy. The cash is not there to pay off the debt, especially when there is negative cash flow. Companies with this much debt and negative cash flow often use their cash reserves to pay off their debt, but Carvana does not have enough reserves left. Additionally, borrowing at record-high interest rates is not a viable option. Dilution of shares is another option, but with a market cap of $700 million, diluting by 50% would only raise $375 million and would cut shareholder value in half. These are not probable options. This is why the stock plummeted on news that Carvana is in talks with its lenders to restructure its debt. Additionally, the company’s business model relies heavily on expensive real estate space and heavy marketing, which are expensive and difficult problems to solve.

I believe it is likely that this company will end up filing for bankruptcy, with the company staying intact but shareholders being wiped out. This outcome is not 100% certain, but it is where the odds are pointing. However, it is worth noting that there has been some insider buying by high-level employees in the past few months. This could be seen as a counterargument to the notion that the company is at high risk of bankruptcy. It is ultimately up to the investors themselves to interpret the data and consider whether insider buying by high-level employees is a positive sign for the company’s future. Investing is not a straightforward process and there is an element of art to the trade, especially when trying to predict the future.

Blue Apron is a unique company that saw a spike in demand during the pandemic due to its business model of sending ingredients to customers to cook nice meals. However, this business model relies heavily on marketing and expensive shipping costs, as well as the impact of inflation on rising food costs. The stock has been trading below $1 for the past month and recently received a warning (stocks on reputable trading platforms must have a share price above $1). Its market cap stands at $37 million. A large stakeholder recently sold shares at this depleted value, which is often a warning sign. The company generates around $100 million in revenue per quarter, has $30 million in cash as of their latest filing, and $63 million in debt, with a negative cash flow of $22 million. The financial situation does not seem as dire as it does for Carvana. However, other metrics are important, such as whether the company is growing in any way or if it has reached its peak (during the pandemic). Are they one of the top food delivery services among their competitors? These are key questions that must be answered to assess the risk of bankruptcy for Blue Apron. It is possible that they will be able to fend off bankruptcy for years, but the end may come at some point in the future. I do not believe they are in immediate danger of bankruptcy, especially given their recent cash injection agreement. In my personal opinion, I do not believe that this company has much of a future ten years down the line in its current form. However, they are likely to be able to survive based on their current resources and have the potential to pivot their business to something more sustainable.

Conclusion

The Stock Market has seen significant challenges in 2022, particularly in the retail and cryptocurrency sectors where a number of bankruptcies have occurred. With the Federal Reserve maintaining high-interest rates, stocks with low profitability and cash reserves may be particularly vulnerable to bankruptcy in 2023. It is crucial for investors and traders to assess the financial health of their stocks and consider strategies to minimize potential losses.

In this article, I provided two examples of stocks that are at risk of wiping out shareholder value. It is important for investors to understand the risks and probability of stocks going bankrupt, as overestimating the risk can be just as harmful as underestimating it.

To assess the risk of bankruptcy, investors can consider:

1. The profitability of a company and its cash reserves.
2. If the company is running low on cash, can it raise money through share dilution or private investors? Are interest rates low enough to make borrowing from the bank a viable option?
3. Whether insiders are buying or selling shares, or taking no action.
4. Whether the company is unique in any way and growing in key metrics, which could make it attractive to external investors or potential buyers.

It’s important to note that sometimes a company may need to buy time to pivot its model toward profitability. We have seen this happen with Amazon, which shifted toward the cloud. I hope that this article was informative, particularly for the influx of new traders who have entered the market in recent years.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.