Using S&P Credit Ratings to Evaluate Your Investments

S&P (MHP) credit ratings give you an in depth look into a company's financial health, but can they also be used for bear/bull strategy trading? Turns out they can. Here's proof:

When the market has turned sour, the highest rated companies (A+) have outperformed the lowest rated companies (C) by a whopping 45%. For every notch up on the credit rating scale, the company has performed better through this recession. Here is a table which displays the performance of stocks grouped by their S&P quality ratings from the beginning of 2008 to last December:

Quality Rating	Return
A+	(30%)
A	(40%)
A-	(45%)
B+	(45%)
B	(50%)
B-	(60%)
C	(75%)

Data courtesy of Hussman Funds.
Returns rounded to nearest 5%.

The lower quality, highly leveraged companies may see volatile swings in the near-term, but in the long-run, the higher rated companies should flourish. While withstanding the downturn better than the lower rated companies, they should be able to capitalize on lower costs through acquisitions or mergers, especially if they leverage their strong balance sheets.

Although credit ratings do not tell much about a companies future growth prospects, I do think it should be taken into consideration when making long-term investments.

The data used in this article was found with Gridstone Research Software.

Comments

[Ed Sweeney:]

From S&P: Please note that S&P’s ratings are not investment advice. We believe ratings are one tool investors may choose to utilize when making an investment decision. For more information about ratings, please go to aboutcreditratings.com.

Jun 23 12:32 PM