These companies are playing out like Grimm fairy tales

If only 20/20 hindsight came with a time machine, then we’d never lose any money in bad investments. Fortunately, there is this thing called due diligence that is supposed to help us avoid those entanglements in the first place. Sometimes, however, that isn’t enough. You must always keep a close eye on your company’s story, and that story changes from quarter to quarter, and even on a daily basis.

I’ve found four companies whose stories are turning into Grimm fairy tales with horrifying endings. Sell them before the book closes:

Sprint Nextel

Sprint Nextel (NYSE:S) is a terrifying tale. There’s nothing worse than owning a commoditized business, unless it’s a really expensive business to run. That’s the fate that befalls Sprint Nextel. Not only must it compete with massive companies like AT&T (NYSE:T) and Verizon (NYSE:VZ) but it must do so amid flat revenue, declining free cash flow and annual losses.

Sprint is expected to report losses at least through 2012, and it doesn’t even pay a dividend. At $2.88 per share, there isn’t much reason to short, nor is there any reason to buy. But if you are holding on waiting for a miracle, the only one you’ll get is a buyout by some other entity for a tiny premium, if any. And with $18 billion in debt, I wouldn��t even count on that. Sell Sprint.

MGM Resorts

MGM Resorts (NYSE:MGM) looked like it might be able to reverse course this past year, but the company just isn’t making enough money with $6.3 billion in annual revenues to make a dent in its $12.6 billion in debt. That debt is mostly the result of the massive CityCenter complex in Las Vegas, which cost more than $9 billion and went up just as the financial crisis hit.

Worse, MGM has almost $1 billion in debt coming due duri! ng the n ext year, and it might have to draw on its credit facility to pay that off. There are loan covenants to meet, and money to spend to keep the properties they have up to snuff. All that takes away from what cash flow the company can generate. MGM is a definite sell, and might even be a short.

Netflix

Netflix (NASDAQ:NFLX) has been the poster child on poor management as of late. The company is in a box because the DVD business is slowly going to be replaced by streaming video. Eventually — not today, but in the next few years — DVDs will be gone. The problem is that whereas Netflix can buy a DVD, then rent it out as often as it likes, it must pay hundreds of millions (or billions) of dollars for multiyear licensing rights to stream content.

Netflix doesn’t have enough money to do that, and with competitors like Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) having much, much deeper pockets, Netflix eventually will lose that battle. The stock already is down 60% from its recent highs. I think there is more downside. Sell, and maybe even short it if you can stomach the volatility.

IMAX

IMAX (NASDAQ:IMAX) faces secular challenges to its business. The trend is for people to enjoy entertainment where they want, when they want — namely, at home, on DVD, with streaming media, Internet content, video games, you name it. Box-office sales (volume) have been down almost every year of the past 10. IMAX’s revenue share deal with the studios requires numerous blockbusters to have any meaningful impact on revenues, and those movies also must belong to specific genres that give people reasons to see films in IMAX — for the extra premium they pay — in a troubled economy, to boot.

Those films will be limited, so IMAX theaters will spend most of every year without fi! lms addi ng meaningfully to the bottom line. Revenue from installing new systems will be finite, and if China should implode, those revenues will be cut short by cancellations. IMAX is a sell.

Time is factoring against all of these companies. IMAX probably has the longest shelf life, and you might find swing trades there. Netflix is a long-term short. MGM might have a chance, but right now, things aren’t looking good. Sprint might be able to tough it out because of its free cash flow, but why put money there when you can put it somewhere else?

As of this writing, Lawrence Meyers did not own a position in any of the aforementioned stocks.