Worse than a "Sell" Rating

January 7, 2009
Special Feature

A few years ago, stock analysts were being taken to task for not issuing plain-language securities ratings like "buy," "sell," and "hold." Critics came down especially hard on the scarcity of "sell" ratings, accusing analysts of not wanting to upset current or potential investment banking clients.

A few years ago, stock analysts were being taken to task for not issuing plain-language securities ratings like “buy,” “sell,” and “hold.” Critics came down especially hard on the scarcity of “sell” ratings, accusing analysts of not wanting to upset current or potential investment banking clients. In contrast, analysts who cover the carnage on Wall Street have now come up with an even more dire rating than “sell”: Going to zero.

When a company goes bankrupt, shareholders are usually last in line for any compensation, behind creditors and suppliers. At best, shareholders may receive some percentage of any new stock issued when and if the company emerges from bankruptcy. More often, a shareholder is left with worthless stock. Investors in big-name firms like Lehman Brothers, Washington Mutual, and Sharper Image have already found themselves holding stock worth just a tiny fraction of their purchase price.

According to some Wall Street watchers, they may soon be joined by holders of stock in companies like satellite radio provider Sirius XM and mall owner/developer General Growth Properties. Some stock analysts are predicting the same fate for GM investors down the road, even if the government comes up with a bailout plan for the giant auto maker. Morningstar, the stock and mutual fund analysis firm, reports that 32 of the 2,000 companies it covers are in danger of going under, a number that has almost doubled in just the past few weeks.