3 Stocks Swirling the Drain

07/27/2011 11:30 am EST

Focus: STOCKS

Borders, the second largest bookstore in the US—like Blockbuster before it—failed to surprise Wall Street as it went under with a whimper. As Jeff Reeves of InvestorPlace.com asks, who’s next?

So what stocks are currently stuck in a tailspin and doomed to crash into bankruptcy soon?

Nothing is certain on Wall Street—but if you’re asking me to put money on the most likely candidates for Chapter 11, here are three big-name stocks that are in serious trouble and might not make it another year:

Rite Aid (RAD)
This pharmacy chain faces a trifecta of problems that it simply cannot overcome: poor reach, poor financials, and no hope for growth.

The drugstore game is a difficult racket, characterized by high competition and razor-thin margins. Drug benefit plans and Medicare providers are embracing online sales and mail order to cut costs, so traditional drug stores have to slash prices to keep up. Take Wal-Mart (WMT) pharmacies, which offer $4 prescriptions on select drugs.

Then you have drug stores that simply snag customers with convenience. Walgreens (WAG) commands a 20% share of the retail drugstore market, and claims to fill one of every five US retail prescriptions.

Rite-Aid just doesn’t have the scale to offer lowball prices like Wal-Mart, or the reach to turn over the sheer volume of Walgreens.

And it’s only going to get worse—last week’s announcement that Express Scripts (ESRX) might snap up Medco (MHS) with a staggering $29 billion buyout would create a company with a 30% market share of the total prescription-drug market.

Rite-Aid is being squeezed out, plain and simple. RAD has tallied just a single profitable quarter in four years, and continues to bleed red ink.

Heavy debt loads, weak same-store sales, and no money to grow means more of the same and no ability to change course. So it’s not as much a question of whether Rite-Aid will go under, but when.

Pulte Homes (PHM)
What’s up with Pulte Homes? Very little.

Pulte stock is off about 80% since early 2007. And I looked at the past 17 quarters for Pulte, dating to the first quarter of its fiscal year 2007, and there’s not a single profitable period to be found.

Admittedly, tomorrow’s earnings report could show Pulte’s first profitable quarter since 2006 (presuming it had one…I was only willing to look at four fiscal years). And Pulte has managed to keep liabilities reasonably low, despite the horrific housing market, by laying off workers and slowing construction to a crawl.

But its debt-to-assets ratio is disturbingly high at about 50%. What’s more, Pulte reported it lost almost $1 billion in the third quarter of 2010—so don’t fool yourself into thinking the company has been in the ballpark of breaking even for the past few years.

If macroeconomic conditions continue to push people away from homebuying in the near term, Pulte might not have the strength to survive until the market firms up.

Zale Corp. (ZLC)
The iconic jewelry store, once a hallmark of almost every mall in America, was trading for as much as $30 per share before the financial crisis. As consumer spending flopped, so did the stock—down to about $6.25 a share currently.

But a 75% flop isn’t Zale’s only problem. Zale has been losing money for each fiscal year since 2007—although, unlike the previous two stocks, it has had glimmers of quarterly profitability scattered across the last four years.

But most disturbingly, revenue has been steadily eroding—from $2.43 billion in fiscal 2007, to $2.14 billion in 2008, to $1.78 billion in 2009, to $1.61 billion in 2010. Not an inspiring trend. The company is hoping to reverse that trend this year, but we’ll see.

The ugliest statistic I stumbled across was from an S&P database that plots the company’s growth over the previous five years at an ugly 93.1%.

In 2008, Zale closed 105 locations—12% of its previous total. Then it shuttered an additional 191 stores for an additional 25% cut. Those cutbacks have helped a bit, and Zale might not be on the edge of failure at this moment.

But if the company doesn’t find its way soon, it could be squeezed out of the market by both the macro trends and by competitors that have managed to grow revenue and profits even as Zale stumbles.

Read more from InvestorPlace.com here…

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