It might or might not be a surprise to investors that the US Bailout Plan was voted down today and the market reaction was swift, decisive and clear: down…significantly
The TSX closed down significantly today after being down over 900 points at one point as nearly everything dropped without discretion.
There are a lot of investors, friends and family who have recently asked me what they should do in this current environment. It’s easy to say that someone should stick to a certain investing style, stick with quality or maintain their asset allocation and plan. But when you watch your portfolio bleed red week after week and hear such dire perspectives in the media it’s difficult to know if you’re doing the right thing. When I provide unbiased advice to someone I usually try to put it into perspective for them by demonstrating how I apply what I know to suit me best as an investor.
Over the next ten days I’ll share with readers 10 core concepts that I’m focused on at the moment and let you decide if any can be applied to your situation in order to better protect your investments from risk during this difficult period and suggested stocks that meet each criterion.
Low or negligible debt and strong cashflow is going to be a necessity in a market such as this. Even if politicians decide to agree and some government sponsored plan is implemented companies are going to encounter financing troubles regardless. We are in a tight credit environment because financial institutions are hesitant to loan other companies money because of the lack of transparency that exists in the market.
Company A doesn’t know if Company B is able to pay them back on the terms that they agree on and this freezes up the market as a lack of trust emerges. While capital positions might appear strong, banks and other lenders have now seen goliaths fail and are nervous about the underlying quality of capital in question.
Low debt and cashflow are vitally important. Cashflow is the bloodline of a business and supplies what it needs, where it needs it and when. Companies with excess cashflow or adequate cashflow to meet their operating needs won’t need to borrow expensive credit or risk shutting down parts of their business to conserve cash.
If you can generate cashflow to pay off your debt or significant strength in your balance sheet then you have the ability in the face of your competition to receive financing at a much cheaper cost than other companies or the general market. While this isn’t a sustainable competitive advantage it is still an important advantage in the interim. Financing might mean the difference between survival and failure as we’ve seen recently with large failures. Cashflow pays the bills and if a company has excessive debt that is costly to repay or difficult to service/refinance than their financial health is severely impaired. No individual knows how long this might last and very few companies will either.
Bottom Line: Don’t invest with companies that have significant debt or inadequate excess cashflow from operations to fund that debt conservatively.
Suggested Stocks I Own: Manulife Financial (MFC), Russel Metals (RUS) & Saputo (SAP)
Great start. I’m looking forward to the other 9.
Walgreens (WAG) is another great example.
Exactly MG. I think we're about to witness (at least initially) a period where the market provides a premium to companies who have strong balance sheets and an ability to finance debt much cheaper than others. This was taken for granted over the past decade, but I think we'll start to see a concentrated focus on it again. To some degree we are already with examples such as WFC & MFC.