Debt Supercycle: Are These Leveraged Companies in Trouble?

(Written by Rebecca Lipman. List compiled by Eben Esterhuizen, CFA. Institutional data sourced from Fidelity.)

Will the new EU bailout fuel a debt supercycle? According to several analysts it very well could.

According to Fortune the developed world faces a paradox: easy credit is the solution to financial problems, and easy credit is the source of financial problems. European leaders are all caught up in this Catch 22 as they aim to manage the debt problems of Greece, Italy and Spain in a summit on Wednesday.

Right now the European Financial Stability Facility (EFSF) has $400 billion in committed funds for the use of propping up troubled financial institutions, and in turn their country’s economy. This is in addition to the $200 billion already spent on Ireland, Portugal and Greece.

But more money is needed to pump up the economies and assure the markets everything is under control. This has some worried that European economies will start to fall into a “debt supercycle,” a term coined in 2007 by BCA Research.

“The debt supercycle is a simple idea: Sound economic policy requires deficit spending and stimulus efforts to stop financial crises and restore economic growth. But in doing so, it lays the groundwork for even bigger bust later on.”

Essentially, bailout of a small crisis needs an easy flow of money that can lead to a bigger crisis, which requires an even larger and easier flow of money to move on. The pattern repeats until the necessary bailouts are too large to be managed. Has Europe reached that point?

Fortune notes, “most economists and policymakers see the 100% level of debt-to-GDP as the line where economies become unsustainable: historically, rising above this level is seen as sparking a long, slow economic and political descent.” And while countries like Japan have a shocking 226% debt to GDP ratio most of that debt is owed to itself.

Unlike Japan, the European Union has an 85% debt to GDP ratio right now and largely owes money outside its borders. With the addition of a $1.3 trillion dollars in bailout funds (the amount many officials say is the necessary to stabilise the EU) the debt to GDP will immediately raise to 94%.

So, are you worried about the debt super-cycle’s possible impact on your portfolio? To help you explore this idea, we identified about 150 S&P 500 stocks have the highest ratio of long-term debt to equity.

From this list, we collected data on institutional transactions, and identified the names that have seen the largest outflows during the current quarter.

Big money managers appear to be concerned about the debt levels at these companies–do you own any of these names?

Use this list as a starting point for your own analysis.

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1. Gilead Sciences Inc. (GILD): Engages in the discovery, development, and commercialization of therapeutics for the treatment of life threatening diseases worldwide. Long-term debt / equity ratio stands at 64.0%. Net institutional sales in the current quarter at -26.0M shares, which represents about 3.4% of the company’s float of 765.47M shares.

2. Sealed Air Corporation (SEE): Sealed Air Corporation, through its subsidiaries, manufactures and sells packaging and performance-based materials and equipment systems worldwide. Long-term debt / equity ratio stands at 54.0%. Net institutional sales in the current quarter at -5.7M shares, which represents about 3.92% of the company’s float of 145.40M shares.

3. Gap Inc. (GPS): Operates as a specialty retailing company. Long-term debt / equity ratio stands at 51.0%. Net institutional sales in the current quarter at -27.4M shares, which represents about 7.48% of the company’s float of 366.29M shares.

4. Cintas Corporation (CTAS): Provides corporate identity uniforms and related business services in North America and Latin America, Europe, and Asia. Long-term debt / equity ratio stands at 50.0%. Net institutional sales in the current quarter at -8.1M shares, which represents about 7.39% of the company’s float of 109.68M shares.

5. Kohl’s Corp. (KSS): Operates department stores in the United States. Long-term debt / equity ratio stands at 49.0%. Net institutional sales in the current quarter at -9.4M shares, which represents about 3.74% of the company’s float of 251.38M shares.

6. The Interpublic Group of Companies, Inc. (IPG): Provides advertising and marketing services worldwide. Long-term debt / equity ratio stands at 47.0%. Net institutional sales in the current quarter at -21.2M shares, which represents about 4.46% of the company’s float of 474.81M shares.

7. Janus Capital Group, Inc. (JNS): Janus Capital Group, Inc. is a publicly owned asset management holding company. Long-term debt / equity ratio stands at 46.0%. Net institutional sales in the current quarter at -16.2M shares, which represents about 9.12% of the company’s float of 177.59M shares.

Interactive Chart: Press Play to see how analyst ratings have changed for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


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