This is a stunning statistic...
It's from a recent report by my friends at Kailash Concepts headlined, "The Art of Stock Picking Returns." As the report puts it...
Over 33%, or ~1,000 of America's largest listed companies, lose money or cannot afford to pay their interest expense. Let that sink in.
That's right... More than one-third of the stocks in the Russell 3000 Index, which tracks the 3,000 largest U.S.-listed stocks, don't make any money and can't afford to pay their interest expense. That's something to really pay serious attention to as rates rise, especially for companies that have debt expiring soon.
Just this morning, the Wall Street Journal ran a story headlined, "Junk-Rated Companies Are Borrowing Again." Simplified, I would call it "junk getting junkier," which isn't good for companies that aren't making any money. According to the article, speaking of speculative-grade companies...
Altogether, these companies issued almost as many bonds in January and February as they did in the entire second half of 2022, when rising yields slowed borrowing to a trickle.
But regardless of when these companies need to raise cash, it doesn't really matter if they're not making any money – and I'm talking about real money, not some made-up metric. As Kailash put it in the report...
This is not complicated. Don't give your money to companies that lose money or cannot afford to pay the interest on debt they owe. Those indebted companies have to pay back the principle as well as the interest.
The significance of this is that what worked in a bull market (buying stock indexes) might not work anywhere near as well in this kind of market...
And the market we're in now is one that we may be in for an extended period of time.
This gets us back to those 1,000 stocks...
Kailash cleverly uses them to argue that in this market, good old-fashioned stock picking is likely to work best.
Sure, the folks at Kailash are talking their book – they sell data used by stock pickers, and they also have a related entity that manages money.
But sometimes people who talk their book aren't just doing it for personal gain... Sometimes it's because they know what they're talking about.
And to be candid, simply weeding out the "loss makers and zombies," as Kailash calls them, would have outperformed the Russell... even in the bull market. Take a look at this chart from the report...
Source: Kailash Concepts
Just remember, following the herd doesn't keep you from losing money... It merely means that if you lose money, you'll be in good company.
To which I say, at the very least, weed out the known losers and zombies. And there are 1,000 of them hiding in plain sight.
Moving on, remember special purpose acquisition companies ('SPACs')? Seems like just yesterday that investors couldn't get enough of them...
As we all know by now, there were more SPACs than there were good businesses for them to merge with.
We're now at that point where many SPACs have to put up or shut up – in other words, either complete a deal or return money to investors, as they must do by two years after being formed.
But among those that did find a dance partner, the reality has been equally dismal – with some being delisted while others have filed for bankruptcy.
One academic quoted in a recent Bloomberg article on SPACs put it best when he said...
There was nowhere near that number of viable private companies ready for the public markets.
On the other hand, I suppose there will be a bunch of assets – and a few stocks – that can be bought on the cheap.
Speaking of SPACs, not all have been disasters, of course...
One that has done surprisingly well is APi Group (APG), which was started by Martin Franklin. He is perhaps best known for consumer products company Jarden, which was sold to Newell Brands (NWL) in 2016.
APi designs, installs, and – importantly – inspects fire safety equipment for commercial buildings.
The hook that grabs my attention: With the office building market suffering post-pandemic, it sounds like a business in peril. Easily missed is that even if a building is empty, for insurance purposes it still has to keep its fire and safety systems in working order.
Franklin owns 10% of APi. I've spent very little time researching the company, since it ranks poorly in my QUANT-X System... which limits my focus.
And yet, it's among the SPAC mergers that appears to have actually worked... at least so far.
Finally, switching gears to a personal note...
Three years ago last Saturday, I had heart surgery to replace my aortic valve and repair my ascending aorta. If you're wondering what life is like after that kind of surgery, here's a very short video I shot to celebrate three years.
Also, on every anniversary, I get up on my soapbox with this reminder...
If you were ever told you or a family member or friend have a heart murmur "but it's no big deal," get a second – or even a third – opinion.
No matter what anybody says, it should be monitored – preferably by a cardiologist. You need to find out what shape your valve is in. An echocardiogram takes an hour and is painless. Untreated, a heart murmur can result in heart failure and a path you don't want to go down.
And just because you don't have symptoms is no excuse. I was pretty much asymptomatic during the 40-plus years after I learned I had a "murmur." I have been monitored every year since – twice a year, then four times a year as things progressed.
Mine was ultimately believed to be a bicuspid aortic valve, based not just on echocardiograms but also MRIs and CT scans.
But when they went under the hood – surprise! – they found a rarer unicuspid...
That was something not even the artificial intelligence ("AI") generated 3D model showed... and not something usually found in someone my age.
At the point of surgery – on March 4, 2020 – I was only starting to have what, in retrospect, were slight symptoms. By monitoring it so closely, I avoided heart damage (but was darn close) and also learned that I had an aortic aneurysm, which was also repaired – avoiding something worse down the road.
As a bonus, you get an angiogram when you have open-heart surgery. I had passed the heart stress test with flying colors... but it's only about 70% accurate. As good as I eat, the doctors found a minor offshoot of one of the main arteries that was 80% blocked. Had I not found it, I ultimately would've had angina and possibly a heart attack. (The doctors can't say for sure.)
I consider myself extremely lucky, but they say you create your own luck... In this case, I know I did.
And by the way: Not everybody who has a murmur needs treatment... but not knowing whether you do is playing roulette.
As for the post-surgical me, if I didn't have the remnants of the scar, I would never know anything had been done.
If you have any questions about it all, feel free to ask – send me an e-mail by clicking here.
March 6, 2023