Introduction
In part 1 found here, Why Record Corporate Debt Might Not Be So Bad: 8 Debt-Laden Blue Chips - Part 1 of this two-part series, I pointed out that low interest rates have been a strong motivating factor for publicly traded companies to utilize debt over equity to finance their operations. Simply stated, it is a lot cheaper for companies to issue debt than it is to issue equity. This has not only resulted in corporations becoming more highly leveraged than perhaps ever before, it also has destroyed shareholder equity (book value) for many companies. These higher levels of debt and lower levels of shareholder equity (book value) had the additional side effect of collapsing the credit ratings of many publicly traded companies.
As evidence of that last point, in part 1, I reported that only 2 companies - Johnson & Johnson (JNJ) and Microsoft (MSFT) - are AAA rated today compared to 60 companies that held that coveted rating in the early 1990s. Additionally, I also shared a report pointing out that half of all investment grade corporate debt is rated BBB or lower, and one third of those companies rated BBB-, which is only one notch away from junk status.
In this part 2, I want to share an additional perspective that my research on the growing levels of corporate debt uncovered. In 2018 there was an excellent white paper produced by O’Shaughnessy Asset Management titled “Negative Equity, Veiled Value, and the Erosion of Price-to-Book.”
Many of the most debt laden stocks that have negative equity have inexplicably outperformed the market most of the time. Moreover, as I will elaborate on later with a few examples, many of these highly leveraged companies are being awarded what appear to me to be excessive valuations. But perhaps more importantly, they have continued to command
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