Chart of the Day

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The chart of the day comes from Ehren Stanhope.

Companies issued a ton of debt in the third quarter. $267 billion for investment grade corporates and $119 billion for high yield, to be exact.

There was obviously a good reason for the explosion in debt. Earnings collapsed and businesses needed to bridge the gap. But at some point in time, you would think the chickens will come home to roost, at least for some of these businesses. To this point, Ehren wrote:

“Investors can be certain that companies losing money while piling on debt produce poor investment outcomes.” 

That statement is not controversial. I think every investor would nod their head at it. But in an upside down market, we’ve actually seen money losing companies doing incredibly well.

Ben did a post on this yesterday, where he found that of the 416 money losing companies in the Russell 3000 with a market cap north of $1 billion, the median return is 20%, and 76 stocks are up 100% or more.

The idea behind these money losing companies is that they’re in super growth mode. Profits don’t matter right now. I understand this line of thinking and I don’t have a problem with it, but everyone can’t be the next Amazon. Some of these companies will look cheap in 10 years, others will look beyond ludicrous.

It’s hard not to get swept up right now in all of the excitement, but if you’re going to be in these names, make sure that your portfolio is not too tied to the success or failure of any one of them.

Source:

Current State of Affairs For Value, Profits, and Debt

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