Editor's note: More volatility is coming, but you still have time to prepare... Many heavily indebted companies are struggling to pay back the cash they borrowed throughout the pandemic as the Federal Reserve keeps its foot on the gas with rate hikes. But Joel Litman – founder of our corporate affiliate Altimetry – says these struggling businesses will eventually shed assets to raise capital... resulting in a wave of cheap stocks with high upside potential. That's why Joel believes it's critical for folks to start preparing immediately in order to position themselves to profit from this market turbulence. In today's Masters Series, adapted from the April 24 issue of the free Altimetry Daily Authority e-letter, Joel discusses today's high-interest-rate environment... explains why the market downturn we've seen could drag on for much longer... and details how investors can take advantage of this ongoing downtrend...
The Looming Opportunity From Past Corporate Excess By Joel Litman, chief investment strategist, Altimetry It's fun to run a business when everything is going well... When the economy is strong, interest rates are low. Access to capital is cheap. Customers are happy to buy products and services. Companies can take on low-interest debt to invest, fuel growth, and make acquisitions. And when the debt comes due in a few years, they can refinance it with "easy" credit. Everyone is happy... from lenders and shareholders to suppliers and management. Continued investment means higher returns and a bigger scale for everyone involved. This virtuous cycle of leverage leads me to one of activist investors' favorite moves. It's quite simple, really. They tell companies to take out debt at low interest rates and buy back shares. Wall Street refers to this move as a "leveraged recapitalization." It increases the company's leverage ratio and reduces the number of shares outstanding. And that means the remaining shareholders get a bigger ownership stake. That's in good times. Good times don't last forever, though...
| Recommended Link: | |  Wall Street's 'Reckoning' Hits in the Next 60 Days The largest hedge funds like Millennium Management, Citadel, Point72, and more are now anxiously awaiting the greatest Wall Street event of 2023. More than $10 trillion and more than half of the U.S. stock market will be impacted... And abnormally large gains – and losses – are set to follow. Get a free recommendation AND learn how to prepare, here. | | |
Today, we're seeing what happens in bad times. Interest rates are high, and companies face refinancing headwalls in the next three to five years. They're starting to consider unwinding these moves. As I'll explain, the coming flood of sellers is going to drag valuations lower... and some sellers will have to face tough debt decisions. That could create hidden opportunities for savvy investors. Business heads are no longer looking to invest... A recent EY poll showed that 44% of U.S. CEOs are preparing to make divestitures this year. They're scrambling to take apart the empires they've built. The biggest reason for this is money. They want to raise cash to manage their debt maturities. We can see this through our aggregate Credit Cash Flow Prime ("CCFP") analysis. It compares companies' financial obligations against their cash positions and expected cash earnings. In short, it shows when U.S. companies have debt coming due. To analyze the whole U.S. market, we looked at the CCFP for companies in the S&P 1500 Index with more debt outstanding than cash on hand. In the following chart, the stacked bars represent these companies' obligations each year for the next five years. We compare those obligations with cash flow (the blue line) and cash on hand at the beginning of each period (the blue dots). Take a look... The companies that need cash flow the most will run into tough decisions by 2024. Cash flows can cover all obligations besides "other uses of cash"... which represents a normal level of share buybacks. There's enough cash on hand to keep these businesses comfortable until 2024 and 2025. All the same, management will need new ways to raise cash in order to keep shareholders happy. They'll also need cash to manage their pending debt maturities. Regular readers will notice this chart looks a bit different from the last time we wrote about our aggregate CCFP analysis. That's because we were looking at how smaller companies would fare. This time, we're looking at the companies that are most in need of cash flows... no matter their size. These companies need more capital. And they need it soon. This is exactly why 44% of CEOs are looking to raise capital. It's not just a whim of the C-suite. It's necessary for survival. That's why 2024 may be the year of divestitures... And it could mean big opportunities for smart investors. Companies will sell assets to raise capital. They often shed underperformers when they're likely to get the least value for them. You've probably heard the mantra "buy low, sell high." Management teams, like many investors, aren't great at actually doing this. Those divestitures tend to outperform. Research by Credit Suisse (CS) and JPMorgan Chase (JPM) shows spinoffs beat the market by upward of 13% in the first year on average. There's even a website dedicated to these opportunities, called The Spin-Off Report. It helps investors keep an eye on divestiture activity. If you keep your eyes peeled, you can take advantage of management teams that overspent in boom times.... Regards, Joel Litman
Editor's note: A lot of companies will face a cash crunch in the coming quarters. Looming debt maturities likely mean a lot of business sales. Patient investors have a chance to pounce on some great spinoffs at a discount. This isn't the only opportunity that's approaching right now... Joel recently went on camera to detail how major banks and hedge funds are preparing for a Wall Street event that's set to take place in the coming weeks – one that could send some stocks soaring... while slashing others by up to 90%. And he revealed the name and ticker of a specific stock you need to sell immediately. Watch the full replay here...
| Recommended Link: | |  Sell This Popular Stock NOW More than 1 million people around the world follow Marc Chaikin, a Wall Street veteran with 50 years of experience, for his surprisingly accurate stock predictions. And he just gave them an urgent SELL ALERT for one of the most popular stocks in U.S. history. He says, "After years of breathtaking gains, this company's day in the sun is coming to an end. You must sell this stock – NOW!" Get the ticker here. | | |
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