By Justin Spittler, editor, Casey Daily Dispatch
Tesla is on thin ice.
I say this for a few reasons. First, demand for its vehicles is plunging. Also, competition in the electric vehicle space is heating up. And high-ranking executives are leaving the company in droves.
These aren’t signs of a healthy company. They’re signs of a company that is in serious trouble.
Of course, you’d know that already if you read yesterday’s Dispatch. In that special installment, Wall Street veteran Whitney Tilson said that Tesla has more red flags than any company he’s studied in his two decades on the Street.
And perhaps Tesla’s biggest red flag is its balance sheet. The electric car maker has $12 billion in total debt with $2.6 billion of that debt due this year.
When a company’s drowning in debt like this, its other problems become much more severe.
• This is why I’ve been urging readers to avoid Tesla for over a year…
But here’s the thing. You could still be in serious danger even if you listened to me.
I say this because Tesla isn’t alone. Hundreds of major U.S. companies are drowning in debt.
But don’t just take my word for it.
The Bank for International Settlements (BIS) estimates that 16% of U.S. companies are “zombie” firms. This means that they can barely make enough money to pay the interest on their debts… or worse, don’t make enough money to service their debts.
You don’t have to be a Wall Street veteran like Whitney to see that this is a major problem.
Unfortunately, many investors own zombie companies without even realizing it. The good news is that you can still protect yourself. I’ll show you how to do that at the end of this essay.
But I should point out something important first…
• Thirty years ago, just 2% of U.S. firms were zombies…
In other words, there are eight times more zombie firms today than there were just three decades ago.
You can thank the Federal Reserve for that. Regular readers know what I’m talking about…
In December 2008, the Fed dropped its key interest rate to effectively zero and held it near record lows for almost seven years.
This made it incredibly cheap to borrow money. So corporate America – naturally – went on a borrowing binge.
See for yourself.
You can see that total outstanding corporate debt is up 86% since 2008. For comparison, the U.S. economy grew just 18% over the same period. For more on how the Fed created dangerous distortions in the economy, check out this recent interview that I did with Casey Report chief analyst Nick Giambruno.
And here’s the thing…
• Zombie firms aren’t just a plague in the United States…
According to the BIS, 12% of the world’s companies are zombies.
So there’s a chance you’re invested in a zombie company… no matter where you reside.
How is that possible? Well, it’s simple: The Fed wasn’t the only central bank to introduce rock-bottom interest rates.
Every major central bank slashed rates to zero after the global financial crisis. Some even introduced negative interest rates… including the European Central Bank and the Bank of Japan. Negative interest rates mean you get paid to borrow money.
This unprecedented monetary intervention helped fuel the zombie firm outbreak.
• Zombie firms aren’t built to last…
Eventually, they’ll collapse under the weight of their own debt.
You obviously don’t want zombie firms in your portfolio when that happens… So I encourage you to take a good look at the stocks you own.
Specifically, look at the interest coverage ratio of the individual companies you own. This ratio measures the ability of a company to pay off its debt.
It’s calculated by taking a company’s earnings before interest and taxes (EBIT) and dividing it by its interest expense. These figures can be found on a company’s income statement, which you can view for free on Yahoo! Finance.
A high interest coverage ratio indicates a wide margin of safety. A low number indicates a narrow margin of safety. And a number below zero tells you that a company’s not making enough money to pay the interest on its debt.
Here’s an example…
You’re looking a section of Hertz Global Holdings’ (HTZ) recent income statements, which I pulled from Yahoo! Finance.
You can see that Hertz’s EBIT for last year (far left column) was $452 million (the numbers in the table above are in thousands). But its interest expense was $717 million. That translates to an interest coverage ratio of just 0.63.
This means Hertz can barely pay the interest on its debt…
That makes Hertz a zombie.
• You want to avoid those companies like the plague at this stage in the economic cycle…
So consider pruning your portfolio of zombie firms if you haven’t yet… companies with an expense ratio close to zero, like the Hertz example above.
You may also want to lighten up on companies whose interest coverage ratio has declined significantly in recent years.
This indicates deteriorating financial conditions… and those companies could turn into zombies as the economy slows.
April 18, 2019
P.S. Investing “prophet” Whitney Tilson also believes that Tesla will crash… ruining its investors. And last night, he went on camera to reveal the name and ticker of the “No. 1 retirement stock in America.”
But don’t worry if you missed it… Whitney is giving Dispatch readers exclusive access to the replay.
You’ll even get a three-part video series on one of his favorite companies… behind-the-scenes Q&A videos… and two more of his strongest-conviction ideas. Check it out right here.
Readers are flooding our inbox to agree with Casey Research founder Doug Casey on his most recent piece on political correctness…
Thanks for the opportunity to write in. Yes, I agree this PC nonsense is all about dumbing down the people. As you will know this has been going on for many years, however it is now becoming less covert, in fact, rather obvious.
It is not only trying to control the words us older folk have learned over our years but also there is, for the young people, restraining the openness for them to learn many words as they’re not taught in the school system. Having lost access to the necessary words this also restricts learning and thinking of all knowledge areas. It has been said that “when you know the words you know the subject!” Thanks for being offensive and contrarian. Keep it up.
I am in agreement that political correctness has gone too far and that it is a major obstacle to open exchange of ideas and free speech. However, your emphasis on the phrase “pro-life” is misplaced. The phrase itself as you state was developed by anti-abortion supporters because it is more palatable and appealing than anti-abortion. It implies a much broader concept and it should not be used in the discussion of abortion.
For one thing the definition of life in relation to a fetus is not universally agreed upon. For another, can you be pro-life if you support the death penalty or human warfare? We should concentrate more on being sensitive in our discourse rather than worrying about being politically correct and we should eliminate the fuzzy words that get in the way of expressing what we really mean.
Yes, I agree that the censure of free speech is a detriment to a civil society. I wholeheartedly agree with Mr. Casey that people should be able to speak their mind without worrying about some PC jackboots stepping on their constitutional rights.
As always, please send any thoughts, questions, comments, or concerns to [email protected].
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