There's just no good reason to buy Bethlehem Steel stock

January 01, 2003|By Jay Hancock

READERS ASK whether to buy shares of Bethlehem Steel. This column is not in the business of giving stock tips, partly because picking stocks is difficult to do and be right.

But offering advice on Bethlehem Steel shares is easy. For that reason, and because larger lessons can be drawn from the sorry Bethlehem tale, we make an exception.

This column's official investment recommendation on Bethlehem Steel stock is: No. Don't even think about it.

A "strong sell" recommendation is not negative enough for Bethlehem Steel. "Strong sell" implies that people actually own shares they are contemplating dumping. If you own Bethlehem Steel, it's already too late.

Bethlehem has been in bankruptcy proceedings since October 2001. A proud, storied enterprise, it was laid low by foreign rivals, a strong dollar and retiree benefits that proved too generous for the company and its current workers to support.

The coup de grace was the terrorist attacks, which spun the economy into a ditch and removed any illusions that Bethlehem would ever meet its rising debts and other liabilities.

The stock went from $4 in July 2001 to 50 cents or so after the bankruptcy filing to about a dime these days. Bethlehem has been kicked out of the Dow Jones industrial average and the New York Stock Exchange, but hundreds of thousands of its shares still change hands electronically every day.

As recently as November, Bethlehem stock went for as much as 35 cents after having sunk under 10 cents in September. That might have been a nice trade if you actually could have sold and bought at those prices and if there had been any rational reason to expect the stock to triple in value, but there wasn't.

There was no reason for Bethlehem stock to be worth 35 cents. There is no reason for it to be worth 10 cents.

After two years of financial scandals and plunging stocks, the fact that people continue to buy Bethlehem stock as well as shares of Enron, WorldCom and other bankrupt companies proves that no amount of painful lessons or government regulation will stop misguided investing.

Let's understand the bankruptcy system. Companies enter bankruptcy proceedings when they are unable to make interest payments on debt, pay suppliers or meet other obligations. Because they can't pay cash, bankrupt companies must reimburse creditors with the only currency they have left: the ownership stake of the proprietors - the shareholders.

Since companies seldom enter bankruptcy without liabilities that tower over shareholder equity and assets, shareholders almost always get wiped out. Their stake is turned over the creditors, who become the new owners.

At Bethlehem Steel, shareholder equity is worth negative $2 billion, and that will sink to negative $3 billion after the company records a pension-related charge in the next few weeks.

Because there isn't enough of Bethlehem to go around to all claimants, even creditors don't expect to get all their money back. Legally, creditors are ahead of shareholders to get pieces of a reorganized or liquidated Bethlehem Steel. If they don't get made whole, why should shareholders expect anything?

One reason people buy bankrupt stocks is geometry. The stock used to be high, now it's low, maybe it will go back up. Because companies in bankruptcy often continue making things, meeting payrolls and otherwise functioning normally, people can get the idea that the stock is undervalued.

Bethlehem Steel's Sparrows Point mill in Baltimore County and its Burns Harbor plant in Indiana are indeed fine operations, taking in more cash than they spend, making world-class steel. They will almost certainly continue operating. But they won't be owned by the present shareholders.

One fantasy making the rounds on the Internet is that the recent move by the federal Pension Benefit Guarantee Corp. to take over Bethlehem's retirement plan will relieve the company of its liabilities and set its stock free.

But the PBGC is a Bethlehem creditor, standing in line, hat in hand with the other unsecured debt holders, not some savior angel. It's just as worried as everybody else about collecting what it's owed, and it knows the pie ain't big enough.

The only reason to buy stock in Bethlehem Steel, Enron or WorldCom is the hope that someone dumber than you comes along and buys at a higher price. That worked for Internet stocks, but only for a while.

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