In the wake of the failure of Silicon Valley Bank and Credit Suisse, bank balance sheets will come under scrutiny by their executives and regulators. One likely impact will be that they sell assets when possible and tighten their lending standards.
Given the importance of debt-driven consumption, tighter lending standards often accompany recessions. As such, we thought it would be helpful to find five stocks that may likely suffer if lending standards and borrowing rates increase during an economic slowdown.
Our critical screening criteria for this task is the interest coverage ratio. The ratio is derived by dividing a company’s earnings before interest and taxes (EBIT) by its interest expense. A ratio below one implies the company cannot meet its interest payments without selling assets or additional borrowing. These are often called zombie stocks.
Sales and earnings growth for the last five years was another factor. The companies we present have flat to negative growth in both categories. As such, it’s likely, if those trends continue, they will continue to have to rely on banks or the bond markets to stay afloat.
We excluded financial, MLP, and REIT stocks as their interest coverage ratio is often not comparable to other companies.
The stocks selected potentially offer significant downside if the credit markets tighten. However, we do not generally recommend shorting stocks.
Screening Criteria
We considered the following factors when screening:
- Excluded Financial, REIT, and MLP Stocks
- 5-year Sales and Earnings Growth < 1%
- Interest Coverage < 1
Company Summaries
Playa Hotels & Resorts N.V. (PLYA)
Hudbay Minerals Inc. (HBM)
Spectrum Brands Holdings, Inc. (SPB)
Qurate Retail, Inc. (QRTEB)
Koninklijke Philips N.V. (PHG)
Five for Friday
Five for Friday uses stock screens to produce five stocks that we expect will outperform if a particular investment theme plays out in the future. Investment themes may be relevant to the current or expected market, industry and/or economic trends. Investment themes may not always represent our current forecast.
Disclosure
This report is not a recommendation to buy or sell the named securities. We intend to elicit ideas about stocks meeting specific criteria and investment themes. Please read our disclosures carefully and do your own research before investing.
Michael Lebowitz, CFA is an Investment Analyst and Portfolio Manager for RIA Advisors. specializing in macroeconomic research, valuations, asset allocation, and risk management. RIA Contributing Editor and Research Director. CFA is an Investment Analyst and Portfolio Manager; Co-founder of 720 Global Research.
Follow Michael on Twitter or go to 720global.com for more research and analysis.
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