Quantcast
4S Ranch Allied Gardens Alpine Baja Balboa Park Bankers Hill Barrio Logan Bay Ho Bay Park Black Mountain Ranch Blossom Valley Bonita Bonsall Borrego Springs Boulevard Campo Cardiff-by-the-Sea Carlsbad Carmel Mountain Carmel Valley Chollas View Chula Vista City College City Heights Clairemont College Area Coronado CSU San Marcos Cuyamaca College Del Cerro Del Mar Descanso Downtown San Diego Eastlake East Village El Cajon Emerald Hills Encanto Encinitas Escondido Fallbrook Fletcher Hills Golden Hill Grant Hill Grantville Grossmont College Guatay Harbor Island Hillcrest Imperial Beach Imperial Valley Jacumba Jamacha-Lomita Jamul Julian Kearny Mesa Kensington La Jolla Lakeside La Mesa Lemon Grove Leucadia Liberty Station Lincoln Acres Lincoln Park Linda Vista Little Italy Logan Heights Mesa College Midway District MiraCosta College Miramar Miramar College Mira Mesa Mission Beach Mission Hills Mission Valley Mountain View Mount Hope Mount Laguna National City Nestor Normal Heights North Park Oak Park Ocean Beach Oceanside Old Town Otay Mesa Pacific Beach Pala Palomar College Palomar Mountain Paradise Hills Pauma Valley Pine Valley Point Loma Point Loma Nazarene Potrero Poway Rainbow Ramona Rancho Bernardo Rancho Penasquitos Rancho San Diego Rancho Santa Fe Rolando San Carlos San Marcos San Onofre Santa Ysabel Santee San Ysidro Scripps Ranch SDSU Serra Mesa Shelltown Shelter Island Sherman Heights Skyline Solana Beach Sorrento Valley Southcrest South Park Southwestern College Spring Valley Stockton Talmadge Temecula Tierrasanta Tijuana UCSD University City University Heights USD Valencia Park Valley Center Vista Warner Springs

Crapshoot Park

If you're looking for a quiet spot to contemplate the great mysteries of the day -- such as why the current stock market is so speculative -- you might take a seat at San Diego's new downtown baseball stadium, Debtco Park.

Debtco Park? Isn't it Petco Park? Well, officially it's Petco Park, but Debtco Park would be a more apt appellation, and not just because of the big debt the city took on to build it, or the debt you will put on your credit card because of much higher parking and ticket prices.

The San Diego specialty retailer that paid an unspecified amount of money to put its name on the new ballpark, Petco Animal Supplies, has been showing good results of late, but it faces a potential time bomb: far too much debt, particularly junk debt.

Generally, securities analysts get worried when a company's debt is 40 to 50 percent of its total capitalization. But Petco has a stunning $311.5 million of long-term debt, and $170 million of that is junk debt paying an interest rate above 10 percent. There is another $75 million that has been committed but not yet tapped. And Petco has barely any equity, or the value of stockholders' ownership. More than 95 percent of its capitalization is debt -- not only the junk debt, but also high-cost short-term debt with interest rates that float upward when rates in general go up.

Despite this baggage, Petco is one of San Diego's hottest stocks -- an example of what the overall stock market has been about for many months. Since March, stocks have made a very good and generally justifiable climb, because interest rates are so low and the economy is getting moderately better. Stocks are nowhere near where they peaked when the bear market started three years ago, but most of the time this year, stocks have been less overpriced than bonds.

Beginning next month, stocks enter a seasonally strong period. But in this post-March bull run, the smallest stocks have done the best, and the stocks of companies losing money have gone gangbusters. In short, it's a crapshoot market, but in the next few months, less speculative stocks could overtake the gamy ones.

That's why I'd like to focus on two red-hot but risky San Diego stocks: the debt-burdened Petco and loss-laden, historically pockmarked FemOne of Carlsbad, which just went public by sneaking through the back door and has a lousy financial record.

Petco is in an expansion race with Phoenix's PetsMart, also a retailer concentrating on pet supplies. Both stocks are Wall Street darlings; almost all analysts following Petco are bullish.

But PetsMart has its financial house in order. In the giddy 1990s, both companies piled up losses to expand across the nation. Indeed, Petco still has a large cumulative deficit. Petco also amassed a lot of low-quality debt. Now, PetsMart's annual revenues are $2.7 billion while Petco's are $1.5 billion, but PetsMart has only $173 million in debt.

Both stocks sell for more than 30 times most recent 12-month earnings. That's very high by historical standards and also high by current inflated standards. The Dow Jones Industrial Average, for example, sells for about 21 times recent 12-month earnings.

Where Petco went wrong, in my opinion, was in agreeing to a leveraged buyout three years ago. Leveraged buyouts, like tax-avoidance deals, have no economic reason for being, other than making a few insiders rich. The stock of a company is already trading. But the company piles up junk debt to buy out current shareholders at a premium, goes private, and then goes public again a couple of years later -- laden with all that debt. The buyout specialists and the company's top management make a bundle unloading their stock, but no economic purpose has been served, and the company emerges with a monkey (low-quality debt) on its back.

Petco did a buyout in 2000, taking on junk debt, and then went public again in February of last year at $19. Its stock has steadily climbed to above $30. It has soared more than 50 percent since July. "Because the company is performing so well, the bonds are trading at well above par," boasts a Petco financial executive.

Yes, for now. But listen to Petco's confession in its last annual report to the Securities and Exchange Commission, filed in March. "We have and will continue to have a substantial amount of debt," it warns. This debt pile "may limit the cash flow available for our operations and put us at a competitive disadvantage." The company must use "a substantial portion of our cash flow from operations to pay interest and principal on our debt."

Higher interest rates could force the annual debt-service bill to go up, laments the document. The debt load could inhibit the company's ability to get more financing and "heighten our vulnerability to downturns in business."

In my opinion, Petco would have been far better off attempting to retire its 1990s debt as it moderated its expansion spree and digested its prior rapid-fire acquisitions. The leveraged buyout only made the company more vulnerable to vicissitudes. Beware.

Then there's San Diego's hottest stock, FemOne of Carlsbad. It distributes nutrition, skin care, and cosmetics to women. For no apparent reason, its stock has zoomed from 15 cents early this month to around $1.45.

Instead of making a public offering for its stock, the company merged with a corporate shell that then changed its name to FemOne. The shell had planned to be a gold-prospecting company. It had no revenues, and its only employee, its chief executive -- a longtime diddler in mining stocks listed on the raucous Vancouver Stock Exchange -- only spent one-tenth of his time at the company. He had received his shares for one-tenth of a penny each.

In August, the company abandoned its gold-mining ambitions -- if there had ever been any -- and permitted FemOne's honchos, mainly Rancho Santa Fe's Raymond W. Grimm Jr., to gain control and thus get a public market for the stock without having to bare its soul in a prospectus.

There would have been much to tell. Grimm had been a co-founder of USA Inc., which promoted purported health products through athlete pitchmen such as Steve Garvey and Joe Montana. But the Food and Drug Administration charged the products were unapproved and misbranded. USA folded and Grimm moved to a Carlsbad company, Uni-Vite, a peddler of diet food.

Uni-Vite went public by back-dooring into a Nevada shell, also purportedly in mining. But the company ran afoul of the Securities and Exchange Commission and the National Association of Securities Dealers. Grimm became president of Carlsbad's Body Wise International. Then the Federal Trade Commission charged that Body Wise made deceitful weight-loss and cholesterol-reducing claims. In 1995, the company promised it would sin no more.

In 1999, Grimm moved on from Body Wise and, with his wife and two daughters, set up FemOne. Like USA and Uni-Vite, it sells its products through so-called direct or network marketing, also called multilevel marketing, and most accurately, pyramid marketing.

Grimm, who did not return phone calls, and a colleague paid a mere $279,350 for five million shares of stock in the gold-mining company. After the name change, FemOne stock surged, as Uni-Vite's had before crashing. It is hard to fathom FemOne's upswoosh. The company's liabilities are almost double its assets, and it has an accumulated deficit of almost a million dollars. The accountant questions the company's ability to continue as a going concern.

But that's the kind of stock that catches on these days. I've got a song for such crapshoot stocks: "Take Me Out of the Ballgame."

Here's something you might be interested in.
Submit a free classified
or view all

Previous article

Discovery of priest’s letters reveals tension between church, locals

Culture Clash
Next Article

Tennis with François Truffaut and Donal Logue

The film is helped immensely by casting four leads to play their own tennis

If you're looking for a quiet spot to contemplate the great mysteries of the day -- such as why the current stock market is so speculative -- you might take a seat at San Diego's new downtown baseball stadium, Debtco Park.

Debtco Park? Isn't it Petco Park? Well, officially it's Petco Park, but Debtco Park would be a more apt appellation, and not just because of the big debt the city took on to build it, or the debt you will put on your credit card because of much higher parking and ticket prices.

The San Diego specialty retailer that paid an unspecified amount of money to put its name on the new ballpark, Petco Animal Supplies, has been showing good results of late, but it faces a potential time bomb: far too much debt, particularly junk debt.

Generally, securities analysts get worried when a company's debt is 40 to 50 percent of its total capitalization. But Petco has a stunning $311.5 million of long-term debt, and $170 million of that is junk debt paying an interest rate above 10 percent. There is another $75 million that has been committed but not yet tapped. And Petco has barely any equity, or the value of stockholders' ownership. More than 95 percent of its capitalization is debt -- not only the junk debt, but also high-cost short-term debt with interest rates that float upward when rates in general go up.

Despite this baggage, Petco is one of San Diego's hottest stocks -- an example of what the overall stock market has been about for many months. Since March, stocks have made a very good and generally justifiable climb, because interest rates are so low and the economy is getting moderately better. Stocks are nowhere near where they peaked when the bear market started three years ago, but most of the time this year, stocks have been less overpriced than bonds.

Beginning next month, stocks enter a seasonally strong period. But in this post-March bull run, the smallest stocks have done the best, and the stocks of companies losing money have gone gangbusters. In short, it's a crapshoot market, but in the next few months, less speculative stocks could overtake the gamy ones.

That's why I'd like to focus on two red-hot but risky San Diego stocks: the debt-burdened Petco and loss-laden, historically pockmarked FemOne of Carlsbad, which just went public by sneaking through the back door and has a lousy financial record.

Petco is in an expansion race with Phoenix's PetsMart, also a retailer concentrating on pet supplies. Both stocks are Wall Street darlings; almost all analysts following Petco are bullish.

But PetsMart has its financial house in order. In the giddy 1990s, both companies piled up losses to expand across the nation. Indeed, Petco still has a large cumulative deficit. Petco also amassed a lot of low-quality debt. Now, PetsMart's annual revenues are $2.7 billion while Petco's are $1.5 billion, but PetsMart has only $173 million in debt.

Both stocks sell for more than 30 times most recent 12-month earnings. That's very high by historical standards and also high by current inflated standards. The Dow Jones Industrial Average, for example, sells for about 21 times recent 12-month earnings.

Where Petco went wrong, in my opinion, was in agreeing to a leveraged buyout three years ago. Leveraged buyouts, like tax-avoidance deals, have no economic reason for being, other than making a few insiders rich. The stock of a company is already trading. But the company piles up junk debt to buy out current shareholders at a premium, goes private, and then goes public again a couple of years later -- laden with all that debt. The buyout specialists and the company's top management make a bundle unloading their stock, but no economic purpose has been served, and the company emerges with a monkey (low-quality debt) on its back.

Petco did a buyout in 2000, taking on junk debt, and then went public again in February of last year at $19. Its stock has steadily climbed to above $30. It has soared more than 50 percent since July. "Because the company is performing so well, the bonds are trading at well above par," boasts a Petco financial executive.

Yes, for now. But listen to Petco's confession in its last annual report to the Securities and Exchange Commission, filed in March. "We have and will continue to have a substantial amount of debt," it warns. This debt pile "may limit the cash flow available for our operations and put us at a competitive disadvantage." The company must use "a substantial portion of our cash flow from operations to pay interest and principal on our debt."

Higher interest rates could force the annual debt-service bill to go up, laments the document. The debt load could inhibit the company's ability to get more financing and "heighten our vulnerability to downturns in business."

In my opinion, Petco would have been far better off attempting to retire its 1990s debt as it moderated its expansion spree and digested its prior rapid-fire acquisitions. The leveraged buyout only made the company more vulnerable to vicissitudes. Beware.

Then there's San Diego's hottest stock, FemOne of Carlsbad. It distributes nutrition, skin care, and cosmetics to women. For no apparent reason, its stock has zoomed from 15 cents early this month to around $1.45.

Instead of making a public offering for its stock, the company merged with a corporate shell that then changed its name to FemOne. The shell had planned to be a gold-prospecting company. It had no revenues, and its only employee, its chief executive -- a longtime diddler in mining stocks listed on the raucous Vancouver Stock Exchange -- only spent one-tenth of his time at the company. He had received his shares for one-tenth of a penny each.

In August, the company abandoned its gold-mining ambitions -- if there had ever been any -- and permitted FemOne's honchos, mainly Rancho Santa Fe's Raymond W. Grimm Jr., to gain control and thus get a public market for the stock without having to bare its soul in a prospectus.

There would have been much to tell. Grimm had been a co-founder of USA Inc., which promoted purported health products through athlete pitchmen such as Steve Garvey and Joe Montana. But the Food and Drug Administration charged the products were unapproved and misbranded. USA folded and Grimm moved to a Carlsbad company, Uni-Vite, a peddler of diet food.

Uni-Vite went public by back-dooring into a Nevada shell, also purportedly in mining. But the company ran afoul of the Securities and Exchange Commission and the National Association of Securities Dealers. Grimm became president of Carlsbad's Body Wise International. Then the Federal Trade Commission charged that Body Wise made deceitful weight-loss and cholesterol-reducing claims. In 1995, the company promised it would sin no more.

In 1999, Grimm moved on from Body Wise and, with his wife and two daughters, set up FemOne. Like USA and Uni-Vite, it sells its products through so-called direct or network marketing, also called multilevel marketing, and most accurately, pyramid marketing.

Grimm, who did not return phone calls, and a colleague paid a mere $279,350 for five million shares of stock in the gold-mining company. After the name change, FemOne stock surged, as Uni-Vite's had before crashing. It is hard to fathom FemOne's upswoosh. The company's liabilities are almost double its assets, and it has an accumulated deficit of almost a million dollars. The accountant questions the company's ability to continue as a going concern.

But that's the kind of stock that catches on these days. I've got a song for such crapshoot stocks: "Take Me Out of the Ballgame."

Sponsored
Here's something you might be interested in.
Submit a free classified
or view all
Previous article

Tacos Lily: good enough for Anthony Bourdain!

I raise my Tecate to the Master.
Next Article

Can You Escape?, Vote Ready Concert, I Love a Clean San Diego

Events August 13-August 15, 2020
Comments
0

Be the first to leave a comment.

Sign in to comment

Sign in

Art Reviews — W.S. Di Piero's eye on exhibits Ask a Hipster — Advice you didn't know you needed Best Buys — San Diego shopping Big Screen — Movie commentary Blurt — Music's inside track Booze News — San Diego spirits City Lights — News and politics Classical Music — Immortal beauty Classifieds — Free and easy Cover Stories — Front-page features Excerpts — Literary and spiritual excerpts Famous Former Neighbors — Next-door celebs Feast! — Food & drink reviews Feature Stories — Local news & stories From the Archives — Spotlight on the past Golden Dreams — Talk of the town Here's the Deal — Chad Deal's watering holes Just Announced — The scoop on shows Letters — Our inbox [email protected] — Local movie buffs share favorites Movie Reviews — Our critics' picks and pans Musician Interviews — Up close with local artists Neighborhood News from Stringers — Hyperlocal news News Ticker — News & politics Obermeyer — San Diego politics illustrated Of Note — Concert picks Out & About — What's Happening Overheard in San Diego — Eavesdropping illustrated Poetry — The old and the new Pour Over — Grab a cup Reader Travel — Travel section built by travelers Reading — The hunt for intellectuals Roam-O-Rama — SoCal's best hiking/biking trails San Diego Beer News — Inside San Diego suds SD on the QT — Almost factual news Set 'em Up Joe — Bartenders' drink recipes Sheep and Goats — Places of worship Special Issues — The best of Sports — Athletics without gush Street Style — San Diego streets have style Suit Up — Fashion tips for dudes Theater Reviews — Local productions Theater antireviews — Narrow your search Tin Fork — Silver spoon alternative Under the Radar — Matt Potter's undercover work Unforgettable — Long-ago San Diego Unreal Estate — San Diego's priciest pads Waterfront — All things ocean Your Week — Daily event picks
4S Ranch Allied Gardens Alpine Baja Balboa Park Bankers Hill Barrio Logan Bay Ho Bay Park Black Mountain Ranch Blossom Valley Bonita Bonsall Borrego Springs Boulevard Campo Cardiff-by-the-Sea Carlsbad Carmel Mountain Carmel Valley Chollas View Chula Vista City College City Heights Clairemont College Area Coronado CSU San Marcos Cuyamaca College Del Cerro Del Mar Descanso Downtown San Diego Eastlake East Village El Cajon Emerald Hills Encanto Encinitas Escondido Fallbrook Fletcher Hills Golden Hill Grant Hill Grantville Grossmont College Guatay Harbor Island Hillcrest Imperial Beach Imperial Valley Jacumba Jamacha-Lomita Jamul Julian Kearny Mesa Kensington La Jolla Lakeside La Mesa Lemon Grove Leucadia Liberty Station Lincoln Acres Lincoln Park Linda Vista Little Italy Logan Heights Mesa College Midway District MiraCosta College Miramar Miramar College Mira Mesa Mission Beach Mission Hills Mission Valley Mountain View Mount Hope Mount Laguna National City Nestor Normal Heights North Park Oak Park Ocean Beach Oceanside Old Town Otay Mesa Pacific Beach Pala Palomar College Palomar Mountain Paradise Hills Pauma Valley Pine Valley Point Loma Point Loma Nazarene Potrero Poway Rainbow Ramona Rancho Bernardo Rancho Penasquitos Rancho San Diego Rancho Santa Fe Rolando San Carlos San Marcos San Onofre Santa Ysabel Santee San Ysidro Scripps Ranch SDSU Serra Mesa Shelltown Shelter Island Sherman Heights Skyline Solana Beach Sorrento Valley Southcrest South Park Southwestern College Spring Valley Stockton Talmadge Temecula Tierrasanta Tijuana UCSD University City University Heights USD Valencia Park Valley Center Vista Warner Springs
Close