In a changing economy we must rely on tangible results. No longer is the use of convoluded ratios and deceptive stock pricing overlooked by investors in historically stable firms. Do not be fooled by the apparent affordability of debt, it is still just as risky as it has ever been (if not more so) to be an over-leveraged company. The danger associated with high-debt levels is magnified during economic turmoil. You don't need to be a wide-eyed 8-year-old to adhere to the "circle of life" mentality that everything is interconnected within ecosystems. Although ecosystem doesn't actually stand for economic system, the same logic can be applied to the microcosm that is our global economy. It is clear that with such massive corporations taking on heavy-debt loads, we are likely to see failure in the future, which will affect borrowing rates globally and locally, and damage industries vertically and horizontally as links in the "circle" are severed and reputations are battered. GE has been a martyr for this concept, sacrificing market perception by allowing itself to become swollen with debt like a blowfish. The SEC has since acted as the needle, forcing GE to face it's potential pricing fraud via a settlement of $50 million. In 2009, Charles Ortel (Newport Value Partners) publicly tarnished GE's reputation by stating that General Electric's stock is actually only worth $2/share. He continued to compare the behemoth's nearly $500 billion in debt to Brazil's entire external debt of $160 billion; further damaging the company's public image and presenting the possiblity of dismemberment of the historic company.
The major issue emerging from this situation is that companies are creating utility for customers by offering financing while insufficiently covering such "bets" with guaranteed profit, a . A business plan eerily similar to the housing bubble that has since haunted the dreams of millions of Americans. The ease of access to credit seems almost predatory in it's lack of restriction, using the promise of affordability to entice buyers to spend above their means.
Another company that has been publicly berated for their over-leveraged products and slim profit margins is the Northwest beacon, Boeing. Nearly all of their planes are purchased on credit, a risky maneuver in an industry rank with volatility. The question is: how long will investors ride the inflated wave of promised profits and pipe dreams until it is realized that worth is more than a number on a screen. The idea that a companies worth should be based on tangible assets, cash flow and profit margin is often overlooked in a sophisticated arena in which the big players make the moves and the majority follows blindly.
A call to action must be made, a call for accountability not only within companies but for the choices investors make. Personal knowledge based on real experience and research is the only way to truly believe in your investments. No longer can the choices we make be based on the fleeting thought of a blogger or the apathetic advice of a columnist.
Six Stocks to Steer Clear of in the immediate future:
-GE (General Electric): Grossly over-leveraged firm with unsustainable financing branch.
-BA (Boeing): Reliant on credit in a currently credit-wary industry.
-HGSI (Human Genome Sciences Inc.): Historically unprofitable, consistently negative profits (even in growth periods).
-OSK (Oshkosh Corp.): Debt equal to 34 times its equity, contracting mainly with U.S. government in hostile environments.
-TRW (TRW Automotive Holdings Corp.): Recently spiked debt-levels.
-HTZ (Hertz Global Holdings Inc.) <----debt=751% of equity.