samedi 20 octobre 2018

Time to go for some companies with some debt?

There's some fear about high-debt stocks right now because of the rise of the interest rates. Marriott, Sherwin Williams, Lowes and Mohawk (all great companies, but that carry a medium-large debt) have suffered these last days. They've all lost at least 10% of their value recently. There's some other names too, like Canadian Pacific that released great results this week but that didn't rise that much, perhaps partly because of their debt.

I think we should never put a big part of our portfolio in stocks that carry a large debt. The ideal, is a debt-free stock, like Five Below or Richelieu Hardware. But ideal stocks dont always have momentum or an interesting price, so these two examples are not the best in the current situation. But, whatever happens with the reserve or with any other economical stuff, these debt-free companies operate without any worry in that regard. And they sell their stuff for which sales are totally predictable.

I think that the slight rise with the interest rate may be an occasion to look for a great company that carries a medium debt. A great management team that made it's proofs in the past will probably continue to do so with a slight increase of the rate. Obviously, chosing a Valeant type of stock wouldn't be a good idea because I didn't write "astronomical debt".

So, which stocks could be interesting? Those written above. A market drop is a much better moment to buy something than the specific drop of a stock. 

Don't hesitate to disagree with me. 

5 commentaires:

  1. Would this include dollarama or would you say it falls into the vrx astronomical levels? Also, wouldn't the less cyclical revenue breakdown from cnr put it ahead of cp despite of the higher valuation?

    1. Dollarama is an incredible company even if growth has slowed down lately. And CNR may be a little less cyclical than CP, both are great businesses. Surely among the top 10 in Canada.

  2. I own both CNR and CP they are essential services to the Canadian economy and we would grind to a halt without the rails. DOL I sold a couple weeks ago and will look to pick it back up in November's tax loss season selling.

  3. My sense is we want companies with net debt/EBITDA less than 3. I would suggest that the likes of Dollarama will do better in an economic downturn than a cyclical like Magna so you'd prefer economic sensitive stocks to have less debt.

  4. I have been warning subscribers of this service that growth stocks and cyclical stocks are in the danger zone now. I have suggested that you might want to de-leverage, pay down debt and keep a healthy amount of cash on hand to take advantage of some bargains down the road.
    Most dangerous of all are the low p/e stocks that seem like screaming bargains and just keep getting hammered because they are cyclical. For example, I do not see as many RV's being sold with oil prices high and the cost of financing such an expensive purchase increasing as interest rates keep rising. We have seen auto and housing stocks just getting decimated. A lot of stocks that are going for a p/e under ten may soon have no p/e because they will start to LOSE money. Naturally non-cyclical stocks will whether this storm better than cyclicals. But even Walmart is warning us that earnings are headed down.