Green Bell Bottoms, Rising Interest Rates And Buyable Stocks

There are thoughts I’ve been having lately that I haven’t had since I owned bright green bell bottom pants, wore earth shoes, and listened as may parents tried to pick a bank for the next CD by comparing the major appliances they were offering as gifts to consumers who would put their money on ice for a few years for an interest rate of a mere 15% or so. No, I’m not expecting those days to return, but some stock selection techniques from that era may be worth dusting off.

Nostalgic Stock Analysis

Way, way, way back when I started out as an equity analyst, we fussed a lot about the difference between long-term debt and short-term debt. Long-term was good because of the protection it gave to companies from the need to refinance shorter-term obligations at ever escalating interest rates.

We also loved cash and interest income. Talk a about a growing profit stream!

Given that we all seem to have gotten beyond the nonsensical negative-interest-rate notions (which never amounted to anything more than some nominal fees for short-term lending between institutions having reversed direction from the usual borrower-to-lender path; nobody ever believed banks would ever PAY homeowners 5% a year to use the bank’s money to purchase homes) and come to accept the fact that rates have hit bottom, it may now be time to start thinking along the old-fashioned ways.

The question is whether we should start doing that now, or whether we can afford to wait until later, when the sideways trend in in interest rates is finally replaced by a firm and too-obvious-to-ignore uptrend.

An Experiment

I decided to find out by doing a quick experiment on Portfolio123. I built a very simple ranking system that favors companies likely to suffer less or maybe even benefit a bit from rising interest rates. It has only two equally-weighted factors:

  • Long Term Debt as a Percent of Total Debt (higher is better)
  • Interest Income as a Percent of Pretax Income (higher is better)
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Disclosure: None.

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