Worth was spot-on in forecasting the demise of Blockbuster. In his column in the January-February 2002 issue, value manager Steven Romick predicted that “when video-on-demand takes off, the party will be over” for Blockbuster. Founded in 1985 and popular through the ’90s, the home movie rental services company its apex in 2004 before filing for bankruptcy in 2010. The main cause of financial woes? As anticipated, competition from video-on-demand services and the likes of Netflix, which was a mail-order service at the time, and Redbox automated kiosks. Romick also speculated that Electronic Data Systems—the company founded by Texas billionaire Ross Perot in 1982 and sold for $2.4 billion 20 years later—was on the decline; it was purchased by Hewlett Packard in 2008 and defunct in 2009.

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Value Manager Steven Romick looks askance at companies with inauspicious strategies or accounting that raises more questinos than it answers. This is Romick’s fifth turn at identifying stocks likely to hit the skids for Worth readers. The small-cap value manager has certainly proven his mettle: His previous pans have dropped an average of 46.7 percent in the 12 months after appearing in this column… Romick, who knows his way around a balance sheet, is wary of companies whose financials suggest hidden danger. Weak cash flow, rising receivables and slowing inventory turnover are among the clues he spots in the companies here.

BLOCKBUSTER

HEADQUARTERS: DALLAS
NYSE: BBI
FAIR VALUE: $15
SELLING AT: $25*
The transition from tapes to higher-margin DVDs and the focus on at-home entertainment have set shares soaring. Neither is a trend to bet on. Video rentals will ultimately be displaced by video-on-demand.

ELECTRONIC DATA SYSTEMS

Headquarters: Plano, Texas
NYSE: EDS
FAIR VALUE: $45
SELLING AT: $48*
EDS’s cash flow continues to look weak. Its prepaid expenses are ballooning, and receivables are rising faster than sales. EDS trades at 24 times trailing earnings—too high, even given its deteriorating balance sheet.

—Edited by Jim Melloan

(*”Fair Value” prices are the fund manager’s opinion. “Selling at” prices are as of December 14, 2001.)

Reprinted from the January-February 2002 issue of Worth.