While most investors are worried that their troubled stocks will become worthless, Jim Rubin is hoping that's exactly what will happen. Rubin is one of those rare money managers who devotes a high percentage of his time to playing the short side of the market.
Rubin runs a $40 million distressed pool for M.D. Sass Investors Services in New York City. Unlike many traders who make their living selling stocks they hope to buy back cheaper later, Rubin only shorts stocks whose equity he believes will eventually be worth next to nothing.Here are the stocks Rubin recently told Financial World magazine are his current favorite examples of the living dead:
AMES DEPARTMENT STORES, now in bankruptcy, could be a good speculation in terms of both its senior unsecured debt and junior bonds, both now selling for nickels on the dollar, says Rubin. "But no matter what happens in the future, there won't be enough money left to pay the common holders."
BANK OF NEW ENGLAND still hasn't taken all the write-offs it's going to have to take, and the real estate crunch in the Northeast has driven its non-performing loans as a percentage of tangible equity up to a staggering 594 percent. "It's hard to imagine these guys getting out of this situation," says Rubin, who would avoid both the common stock and the company's bonds, although he thinks government assistance could keep the bonds viable.
CHARTER MEDICAL, the psychiatric hospital chain, doesn't have any common stock, thanks to its 1988 recapitalization, but it does have payment-in-kind bonds, recently trading in the teens, which Rubin considers worthless. The reason: an onerous debt load and resistance from insurance companies to the hospital industry's overcharging tendencies.
HARCOURT BRACE JOVANOVICH didn't get as much cash as Rubin expected when it sold off its theme parks. But that's only one reason he believes the company is heading for bankruptcy. The other is the $105 million in added interest payments HBJ will have to start making in September 1992.
INTERCO, another retailing basket case, recently reached a basic agreement with several banks on a restructuring plan. That doesn't impress Rubin, who still expects the common stock to go to zero. "We think there's a 70 percent to 90 percent probability of a standard two-to-four-year bankruptcy," he says.
MIDLANTIC, another Northeastern bank singing the regional blues, is in no danger of seeing its common stock become worthless, admits Rubin. But he does think it's in danger of missing a dividend payment, which could cut the value of the stock further. "Non-performing loans as a percentage of tangible equity is at least 48 percent," he notes.
ZAPATA, finally, is one oil drilling stock that even recent sharp run-ups in crude won't help, according to Rubin's figures. "The company's combined public and private debt is in the neighborhood of $640 million. Since its assets are worth only around $400 million, it's quite clear that the common stock is valueless."
Investor's Notebook reflects the opinions of professionals. It does not endorse specific investments, and no endorsement is implied or should be inferred. For more information, contact the individual firms cited.