The list of powerful companies that have disappeared from the scene is both long and storied.
It includes Amoco, Woolworth, Tower Records, Pan Am, Compaq, Circuit City, and Bethlehem Steel, to mention just a few. And the reasons these brands no longer exist are just as varied.
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Amoco was always financially healthy before it was acquired by British Petroleum in 1988.
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Woolworth’s financial troubles forced it to close 800 stores in 2006 before it transformed itself into Foot Locker.
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High fuel prices, mismanagement, bad luck, and a loss of market share due to the Lockerbie terrorist bombing in 1988 pummeled Pan Am. In 1991, it filed for bankruptcy.
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The digital revolution led Tower Records to liquidation in 2006.
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Squeezed by low-cost competition, high debt, and the collapse of the dot-com bubble, Compaq merged with HP in 2002.
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Mismanagement led to the downfall of Circuit City in 2009, putting 30,000 employees out on the streets.
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U.S. factories moving overseas and low-cost competition led to iconic Bethlehem Steel filing for bankruptcy in 2001.
Make Change Your Ally
This cycle of innovation and destruction, labeled “creative destruction” by the Austrian economist Joseph Schumpeter, is the hallmark of any healthy capitalist economy.
How can we as investors turn this turbulence to our advantage? Here are three ways…
First, as merger and acquisition activity finally ramps up in 2014, it reminds us that there is perhaps no faster way to make a buck than by investing in a promising takeover candidate.
One company I have my eye on is Cosi (NASDAQ: COSI), a chain of 122 “fast casual” restaurants. While Panera (NASDAQ: PNRA) has returned an annualized compounded 14.92% return for 22 straight years — since its IPO in 1991 — Cosi has been an altogether different kettle of fish.
Cosi’s share price has gone from an IPO price of $7 in 2002 to just $1.14 a share. While the company continues to lose money, it seems its only viable option is to be acquired at some multiple of its revenue. This is definitely a “mad money” idea.
Secondly, it seems that when complacency, mismanagement, or competition combine to hit a company’s share price, it is terribly difficult to turn things around.
Investors with foresight and nerve can hit pay dirt by shorting or buying put options on the company’s stock. Such is the case with Coach (NYSE: COH), which was a thriving premium brand of leather handbags and accessories not long ago.
But due to discounting and complacency, while the S&P 500 has zoomed 38% during the last two years, Coach shares have lost 39% of their value.
Third, when a major player falls from grace, there is always a company or two that gains in a big way.
When Compaq struggled in the wake of the dot-com bubble, Dell really took off. The fall of Circuit City was a boon to the prospects of Best Buy.
Pan Am’s struggles to remain viable greatly benefited the fortunes of United Airlines and Delta Air Lines. United bought Pan Am’s profitable Pacific routes, as well as the crown jewel: routes into London’s Heathrow airport. Delta snagged the prized Boston-NY-Washington Pan Am shuttle routes, as well as its remaining European routes.
The big beneficiary (or cause) of Coach’s fall from grace has been Michael Kors (NYSE: KORS), whose stock surged 125% over the last two years.
One final thought: Let’s not forget that each of the companies mentioned here began with the initiative of one person and made investors a lot of money over its rise.
A case in point was the dashing entrepreneur Juan Trippe, who founded Pan Am in 1927 and served as its CEO until 1968. What started with $250,000 in start-up capital and landing rights in Havana grew into the most powerful international carrier in the world.
The lesson here is to make money whether companies and stocks are rising or falling — stay alert and flexible.
Until next time,
Carl Delfeld for Wealth Daily
