The latest issue of Barron's is suggesting that investors may want to look at beaten down, debt-laden companies(subscription required):
Blackstone Group, Apollo Management and the rest of the private-equity crowd may be sidelined by the mess in the credit markets, but investors still can play at their game by purchasing shares of debt-laden companies in the public markets.
Barron's goes on to suggest that, if credit markets stabilize, some companies with heavy debt loads will rebound well. I don't dispute this analysis but I also don't think most investors should go chasing companies with big debt loads. It's always struck me as being somewhat akin to tiptoeing in front of steamrollers to pick up a penny. I've never bought shares of a company with a lot of debt. Sophisticated investors with an ability to really understand the debt, how it's structured, and the risks that go with it may do well with these companies. But if that isn't you, I think your best bet is to stay away.
As Barron's warns, the ultimate danger with investing in heavily leveraged companies is bankruptcy. If you're a disciple of Warren Buffett's first and second rules of investing -- don't lose money and don't forget rule number 1 -- this probably isn't a game you want to be playing.
Closing Bell: Economic Catapult for Thanksgiving & Black Friday (WMT, TGT, GRMN, GOOG, MSFT)
Deere up on Q4 earnings performance
Reid Hoffman: LinkedIn will go public (at some point)
Reader Comments (Page 1 of 1)
3-02-2008 @ 6:05PM
phillip said...
Wow. I really agree with the author on this. I saw the same Barron's article this weekend, and I was surprised to see them recommending debt-laden companies. When I don't understand the company or their debt-structure, I'd stay away from buying that stock.
However, debt, by itself, isn't a bad thing...look at the members in our investment group who buy foreclosures with 10% down. They make a killing in terms of equity and cash on cash return (>100% and 10-30%, respectively).
But in the case of our members buying investment properties, they understand the debt and the market. And at least in Houston, there's always demand for housing.
-Phillip
http://www.mylifechanger.com
3-02-2008 @ 9:18PM
miguel said...
That's very astute Phillip. Leveraged companies, defined in the article as those whose capitalization is >50% debt, are risky, yet buying a house with 90% debt is good. Obviously you weren't in Houston in the early-mid 80's, or just about any where else today.
There's one born every minute.