The Looming Opportunity From Past Corporate Excess

Many companies will need to refinance their businesses to survive this year. And that could create hidden opportunities for savvy investors... [Stansberry Research Logo] Delivering World-Class Financial Research Since 1999 [DailyWealth] Editor's note: The current high-interest-rate environment has caused many businesses to rethink their finances. And according to Joel Litman – founder of our corporate affiliate Altimetry – that gives investors a unique opportunity. In today's Weekend Edition, we're taking a break from our usual fare to share one of Joel's essays, updated from an April 2023 issue of the free Altimetry Daily Authority e-letter. In it, Joel explains how investors can profit from the mistakes of some management teams... --------------------------------------------------------------- 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. That means the remaining shareholders get a bigger ownership stake. This happens in good times. Good times don't last forever, though... Today, interest rates are still 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. But that could create hidden opportunities for savvy investors. --------------------------------------------------------------- Recommended Link: [MUST-SEE: Bad Omen for 1 in 3 U.S. Stocks?]( One man used a set of proprietary data to predict the 2008, 2020, and 2022 crashes. Now, as market optimism soars, he's stepping forward with a new warning: "Most Americans can't see the looming dangers in the market right now. There's a DANGEROUS pattern occurring in a third of public companies – [and your portfolio is likely at risk]( --------------------------------------------------------------- Business heads are no longer looking to invest... In early 2023, an EY poll showed that 44% of U.S. CEOs were preparing to make divestitures. They were scrambling to take apart the empires they'd built. The biggest reason for this was money. They wanted 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 1000 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 needed cash flow the most are likely running into tough decisions by now. 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 through 2024 and until 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. We're using this chart to see the companies that are most in need of cash flows... no matter their size. Based on the data, these companies need more capital. And they need it soon. This is exactly why nearly half 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 doing this. Those divestitures tend to outperform. Research by Credit Suisse and JPMorgan Chase in 2023 showed 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. A lot of companies will face a cash crunch in the coming quarters. Looming debt maturities likely mean a lot of business sales. Take advantage of management teams that overspent in boom times. Patient investors have a chance to pounce on some great spinoffs at a discount. Regards, Joel Litman --------------------------------------------------------------- Editor's note: Despite the recent market highs, Joel sees trouble ahead. Using forensic analysis, he has uncovered a looming crisis that could send some stocks soaring... and cause others to crash in the coming weeks. For the first time ever, Joel and Dr. David Eifrig are teaming up to discuss how to prepare for this market event... And they share how you could potentially triple your money from one overlooked opportunity. [Click here to learn the details](. --------------------------------------------------------------- [Tell us what you think of this content]( [We value our subscribers' feedback. To help us improve your experience, we'd like to ask you a couple brief questions.]( [Click here to rate this e-mail]( You have received this e-mail as part of your subscription to DailyWealth. If you no longer want to receive e-mails from DailyWealth [click here](. Published by Stansberry Research. You're receiving this e-mail at {EMAIL}. Stansberry Research welcomes comments or suggestions at feedback@stansberryresearch.com. This address is for feedback only. For questions about your account or to speak with customer service, call 888-261-2693 (U.S.) or 443-839-0986 (international) Monday-Friday, 9 a.m.-5 p.m. Eastern time. Or e-mail info@stansberryresearch.com. Please note: The law prohibits us from giving personalized financial advice. © 2024 Stansberry Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Stansberry Research, 1125 N Charles St, Baltimore, MD 21201 or [stansberryresearch.com](. Any brokers mentioned constitute a partial list of available brokers and is for your information only. Stansberry Research does not recommend or endorse any brokers, dealers, or investment advisors. Stansberry Research forbids its writers from having a financial interest in any security they recommend to our subscribers. All employees of Stansberry Research (and affiliated companies) must wait 24 hours after an investment recommendation is published online – or 72 hours after a direct mail publication is sent – before acting on that recommendation. This work is based on SEC filings, current events, interviews, corporate press releases, and what we've learned as financial journalists. It may contain errors, and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility.