I’m not against debt.
I have debts myself. I’m sure you do, too.
It lets us pay for big-ticket items like houses and cars. It can mean the difference between going to college or not.
Debt allows companies to finance growth and expansion, buy back shares, restock inventory, pull off merger deals, or any number of things that can positively impact the size and success of the business.
But too much of anything can be a bad thing.
And that goes double for debt.
And especially right now.
Debt becomes more expensive as interest rates rise. The average monthly payment on a 30-year fixed-rate mortgage increased by more than 46% in 2022, according to a new report from the Consumer Financial Protection Bureau.
Higher rates impact a business’ ability to borrow money and finance growth, and they impact a business’ ability to make payments on its current debt.
I have incorporated debt considerations into my Quantum Edge algorithms from day one.
Not because I knew the future of interest rates, but because it is a metric that adds to predictive value to a stock’s analysis.
Low debt levels are an important ingredient for higher stock prices. High debt levels are at least a yellow caution flag if not an outright warning sign.
Especially with the Fed Funds rate – the rate set by the Federal Reserve – now at 5.25%, its highest in 16 years. And with the Federal Reserve now saying it may need to keep rates higher for longer.
When considering stocks to buy right now, I recommend you pay attention to the debt-to-equity ratio. It’s a great way to gauge a company’s leverage.
And you might be surprised at what you find…
Beware the Debt Albatross
If a company owes more than it’s worth – which would be a debt-to-equity ratio over 100% – you have a warning sign of overleverage.
Companies making payments on their debt is known as “debt service” in the business world. Firms can handle larger debt during times of prosperity. But if sales drop, profits shrink or interest rates spike, debt-laden companies can get squeezed – and so can their share prices.
I invest in companies with little to no debt. And by “little,” I mean a ratio of 25% debt-to-equity or less. That means a company has borrowed just one-fourth or less of what it’s worth, which is in the safe zone.
For example, the 10 stocks I currently recommend in my Quantum Edge Trader service carry an average of 24.5% debt to equity.
I push it higher from time to time, but it depends on other factors, like exceptional sales growth, cash on hand, and others. As a rule, though, the higher you go above 50% the greater than chances it might weigh on the stock.
Surprising Stocks Carrying Lots of Debt
To help you out, I decided to look into my latest Quantum Edge dataset at companies worth $50 billion or more with a debt-to-equity ratio of 100-to-1 or higher – meaning they’ve borrowed as much as they are worth… or more.
The decision whether to own such companies involves more than just debt-to-equity, but I suspect you’ll be surprised at some of the stocks on the list.
As a reminder, the Quantum Score is my system’s overall rating for more than 6,000 stocks after analyzing roughly 30 factors for each, one of which is debt. The higher the Quantum Score the better the odds that the stock will make you money. I’ve found the best zone to buy in is between 70 and 85.
Believe it or not, two of the “Magnificent Seven” stocks have more debt than they do equity:
- Apple (AAPL)
o Debt-to-equity ratio: 261.4% (surprisingly big, right?)
o Quantum Score: 58.6 (decent) - Amazon.com (AMZN)
o Debt-to-equity ratio: 106.1%
o Quantum Score: 55.2 (average)
And here are five more debt-laden companies whose stocks almost every investor knows:
- Caterpillar (CAT)
o Debt-to-equity ratio: 236.8%
o Quantum Score: 67.2 (solid) - Home Depot (HD)
o Debt-to-equity ratio: 3,224.3% (yikes)
o Quantum Score: 55.2 (average) - IBM (IBM)
o Debt-to-equity ratio: 246.1%
o Quantum Score: 48.3 (below average) - PepsiCo (PEP)
o Debt-to-equity ratio: 241.9%
o Quantum Score: 41.4 (poor) - Uber Technologies (UBER)
o Debt-to-equity ratio: 159.6%
o Quantum Score: 63.8 (decent)
Best of the Best
You may have heard how much a company or person owes referred to as “debt load.”
And it is a load. Debt is not free, and it can drag down other areas of a business (or household budget) that are strong.
It’s not the “magic bullet” of investing. It’s simply one of many data points that, when taken together, can help us know whether a stock is a good investment.
That’s why I incorporated it into my Quantum Edge system. It’s one of the fundamental factors I analyze, along with technical factors and Big Money inflows.
Find the stocks with the most powerful fundamentals, strongest technicals, and Big Money pouring in, and you have the rarest of breeds likely to make you money. Those are the stocks I recommend you look into right now as we head into the best quarter of the year.
Talk soon,
Editor,
Jason Bodner’s Power Trends
