These 50 Companies Will Protect You From The "Zombie Apocalypse"

“The Walking Dead” really should just be off the air already.

Sadly, even after we’ve seen the last of this seemingly interminable show, zombies will continue to stagger across our landscape in the form of rotting corporations.

One of the arguments trotted out by corporate credit bulls is that U.S. corporations are flush with cash. That simply isn’t true. While a small number of companies -primarily tech giants – are sitting on large cash hoards, the average U.S. corporation is not cash rich and more highly leveraged than before the 2008 financial crisis. The top 1% is doing pretty well – but the other 99% are in terrible shape.

Right now, these 50 companies control about half the cash. The rest are toxic and likely to default.

Here’s what you need to know – and how to profit.

The “Dark Side” of the Balance Sheet Tells a Sobering Tale

Recently, Moody’s Investors Service and Standard & Poor’s published comprehensive reports analyzing U.S. corporate credit quality. The reports make sobering reading. While the two credit agencies’ numbers aren’t precisely the same, they are close enough and paint a troubling picture of a heavily indebted corporate sector. Relying on the excellent analytical work of Societe Generale’s Andrew Lapthorne, I warned about this situation starting in mid-2014. It wasn’t just the world’s central banks that decided to solve a debt problem with more debt. U.S. corporations have been partying like it’s 1999 when it comes to borrowing cheap money courtesy of the feckless Fed, and the result is an over-leveraged and unproductive corporate sector whose riches are narrowly shared by a small percentage of companies while the vast majority of Corporate America is being slowly suffocated by too much debt that it can never repay.

Figure 1: The Rich Get Richer

(Click on image to enlarge)

According to Moody’s, U.S. non-financial corporations rated by the firm held $1.68 trillion of cash at the end of 2015, up 1.8% from $1.65 trillion a year earlier. The top 50 holders of cash accounted for $1.14 trillion of this cash (See Figure 1). The top five companies (Apple, Microsoft, Google, Cisco and Oracle) held $504 billion of cash, or 30% of the total, up from $440 billion a year earlier and $404 billion two years earlier.

But the other side of the balance sheet told a different story.

Total corporate debt was $5.03 trillion at the end of 2015 compared to $2.62 trillion at the end of 2007. Net debt (i.e. debt net of cash) was $3.39 trillion at the end of 2015 compared with $1.88 trillion at the end of 2017. When we look deeper at the ability of corporations to service their debt, Debt/EBITDA (EBITDA measures cash flow) was 2.88x at the end of 2015 compared with 2.46x at the end of 2014 and 2.85x at the end of 2008, and speculative grade debt/EBITDA was 6.15x at the end of 2015 compared to 4.86x at the end of 2007. In layman’s terms, corporations are much more highly leveraged today than on the cusp of the financial crisis.  Corporations have been able to get away with it because interest rates are much lower today than a decade ago.

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