Where will you be when online retail giant Amazon (AMZN) goes bankrupt?
You might think that couldn't happen... at least not in the next decade or two.
The thought of Amazon going out of business seems almost impossible today. After all, the company revolutionized the way we shop. Its sales have grown exponentially larger, year after year, for more than 20 years.
But not that long ago, people probably thought the same thing about another innovative retailer... Sears, Roebuck and Company.
Sears was the most dominant retailer in the U.S. for decades. And it was still the largest retailer in the U.S. back in 1990. No one thought it could possibly go bankrupt back then.
Like Amazon, Sears revolutionized the way Americans shopped.
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It built large department stores outside of cities that attracted masses of shoppers in America's growing suburbs. Its mail-order catalogs offered people a new way to shop from the convenience of their own homes. You could buy just about every product imaginable from Sears... clothing, furniture, towels, mattresses, sewing machines, dinnerware, lawnmowers, tools, and refrigerators and ranges.
If you were born before 1980, it's a safe bet you or your parents shopped in Sears department stores countless times every year. And your family likely ordered clothes and small household items from its thick, colorful mail-order catalogs. But the rise of more efficient retailer Walmart (WMT) and later Amazon spelled doom for the former retail giant.
Sears died on October 15, 2018.
That's the day it filed for bankruptcy protection. Truthfully, Sears would have died much sooner had hedge-fund titan and former CEO Eddie Lampert not extended the company several lifelines... but that's a story for another time.
Sears isn't the only iconic American business that met its demise of late...
Not too long ago, you could barely get through the crowds inside Toys "R" Us during peak holiday season. But last year, the former toy retailing giant announced it was closing all its 880 stores in the U.S. More than 30,000 employees lost their jobs.
At first glance, the death of Sears and Toys "R" Us may not seem that important to the broader market. You might think they are just a couple of retailers that didn't adapt to the changing times of e-commerce.
But that's not the full story...
The fact is, there's a little-known reason why Sears and Toys "R" Us really collapsed. We'd estimate fewer than 1% of Americans are aware of it... But it spells out a much bigger and darker threat that could soon affect at least 100 major American companies and send their stocks to zero.
In short: Sears and Toys "R" Us are just the beginning for corporate America.
You might be wondering how we can be so bearish when the stock market keeps rising. And on the surface, you're right. Things look great for the market. The economy is growing and the benchmark S&P 500 Index has more than tripled over the past 10 years... It's now the longest bull market in history.
But bull markets don't last forever... And the companies most at risk are the ones that loaded their balance sheets with debt. That's what happened to Sears and Toys "R" Us. Their shrinking businesses could no longer afford to pay their debt.
It's no secret that America is struggling with debt. The examples are everywhere. Over the past 10 years, students have racked up enormous debts, which currently total about $1.5 trillion... U.S. consumers now owe more than $1.2 trillion on their credit cards and home-equity loans... and U.S. car buyers owe nearly $1.3 trillion for auto loans. It has gotten so bad that 73% of Americans now die in debt, leaving behind an average of more than $60,000 in obligations.
But what isn't as well-known is how much America's companies now owe in debt.
Corporations are saddled with a record $9 trillion of debt. And it's not just the nominal amount that's a record... Relative to the size of the U.S. economy, companies have never held so much debt.
This means an increasing number of companies owe debts so large that they can barely afford the interest today. And we're not just talking about a small handful of heavily indebted companies... Companies across the credit spectrum are more indebted. Even companies with investment-grade debt — whose credit is perceived safe — owe more than ever before.
For example, $3 trillion of corporate debt is rated BBB today. That's the last rung of investment-grade debt, just one notch above "junk". This debt has more than tripled over the past decade and is now larger than it has ever been.
BBB-rated debt is the largest portion of corporate debt today, making up more than half the entire investment-grade corporate-bond market. In other words, a majority of the debt at American companies with a "safe" investment-grade rating is just one rung above junk. A downgrade of these companies' creditworthiness to junk status could cause their interest costs to soar. Just a small change to the status quo could send hundreds of companies into financial distress.
Following the Great Recession, the Federal Reserve dropped (and held) short-term interest rates down to essentially zero. By doing so, it has almost single-handedly pushed stocks higher and higher.
But most people don't realize that the Fed's actions also created a credit bubble. It started an unheard-of corporate borrowing binge. Before the mid-2000s, U.S. corporations had never borrowed more than $1 trillion in a single year. But from 2010 to 2018 — after the Fed dropped rates to almost nothing — U.S. corporations borrowed more than $1 billion every year.
Recently, the Fed switched gears and began raising interest rates. This is a huge change... especially for those companies that have gorged themselves on debt. (The Fed recently paused its interest-rate hikes for the time being, but rest assured it will raise them again soon when inflation fears arise.)
The engine that fueled the bull market and encouraged hundreds of companies to lever up and borrow big debts has now been thrust into reverse. As this pushes up borrowing costs, hundreds of companies won't be able to afford their debt. It doesn't matter whether it's because of a shrinking business — like Sears and Toys "R" Us — or because of rising interest costs... if companies can no longer make good on their interest payments, they'll be forced into bankruptcy.
In a crisis, some stocks — like elite, capital-efficient, blue-chip companies with healthy balance sheets — will hold up better than others.
But most will collapse. Bond yields are going to move much higher. That will take a huge toll on the stock market. And most stocks will fall — including many of the stocks in your portfolio.
Even if you don't want to short stocks, you should at least know which companies to avoid. The tough thing is to know where to look.
No one knows more than us about the dangers that lie waiting for unsuspecting Americans as the Fed raises rates. Our in-house team of equity and debt analysts — including two accountants, a financial lawyer, a former hedge-fund manager, and a global business analyst — has done more work on this subject than anyone else we know. We've studied thousands of companies. We regularly review more than 40,000 corporate-bond offerings. And we've compiled the ultimate list of names you must avoid as the next crisis unfolds.
We want to make sure you don't own any of the companies on the list below. These are the worst of the worst. Most generate no profits or cash flows... Many are likely to go bankrupt.
The list does not constitute an official recommendation to sell shares short. But below is a list of 10 companies you should avoid at all costs...
|Name||Ticker||Market Cap||Net Debt/ Assets||Net Debt/EBITDA Ratio||FCF Yield||(EBITDA — Capex)/Interest Ratio||Description|
|Tesla||TSLA||$46.4||27.9%||5.5x||0.0%||-0.9x||Sells decent cars at a net loss and needs to raise loads more capital|
|Sprint||S||$24.4||37.4%||2.7x||-3.0%||0.4x||Worst U.S. mobile operator in bad, asset-heavy business|
|Mattel||MAT||$4.7||43.1%||63.8x||-3.9%||-0.7x||Toy company with tired brands, no FCF, and weak digital strategy|
|Brookdale Senior Living||BKD||$1.3||63.4%||42.0x||-23.3%||-1.5x||Levered senior-housing operator with rising costs and declining occupancy|
|Hertz Global||HTZ||$1.5||71.1%||4.7x||-166.5%||-12.8x||Car-rental dinosaur with rising operating costs and ride-share competition|
|Conn's||CONN||$0.8||50.4%||4.9x||15.1%||2.6x||Levered retailer selling goods on credit to subprime borrowers|
|SunPower||SPWR||$1.1||24.8%||-0.8x||-54.0%||-7.3x||Negative FCF, increasing competition, and declining subsidies spell doom|
|JC Penney||JCP||$0.4||45.0%||6.3x||-8.0%||0.5x||Dying, levered big-box retailer with no turnaround strategy|
|Calumet Specialty Products Partners||CLMT||$0.3||69.4%||6.0x||8.8%||1.2x||Lubricant producer squeezed by rising costs and a weak balance sheet|
|Community Health Systems||CYH||$0.4||84.5%||14.8x||-58.2%||0.4x||Money-losing hospital chain with too much debt and declining admissions|
Dollar figures in billions. Data from Bloomberg as of April 11, 2019.
Jim Rogers is an American businessman, investor, traveler, financial commentator and author based in Singapore. Rogers is the Chairman of Rogers Holdings and Beeland Interests, Inc. He was the co-founder of the Quantum Fund and creator of the Rogers International Commodities Index.
Porter Stansberry founded Stansberry Research in 1999 with the firm's flagship publication, Stansberry's Investment Advisory. He is also the host of Stansberry Investor Hour, a weekly broadcast that has quickly become one of the most popular online financial radio shows. At Stansberry Research, Porter oversees more than twenty of the best editors and analysts in the business, who do an exhaustive amount of real-world, independent research.
Austin Root is editor and portfolio manager for the Stansberry Portfolio Solutions products and American Moonshots. He is also director of corporate development at Stansberry Research and a senior analyst for Stansberry's Investment Advisory.