So, is a company’s debt something you should worry about? For the most part, the answer is only in extreme cases. For example, when ranking our All Stocks Universe by debt, Decile 5 is smack dab in the middle of the All Stocks Universe—using debt, but in a responsible way. An Investment of $10,000 in that decile on December 31st, 1963 grew to an inflation-adjusted $704,541, a real average annual return of 8.87 percent.
For comparisons sake, the same investment made in our equally-weighted All Stocks Universe grew to $305,184, a real 7.08 percent average annual return. Thus companies judiciously using debt actually do better than those who do not do so.
It’s only at the extremes where we find the real culprits—looking at the 25 and 50 stocks which had the highest percentage change in debt is truly a portfolio destroying exercise. Had you consistently bought the 50 stocks with the highest percentage change in debt, your $10,000 would shrink to just $941, a real average annual loss of -4.61 percent a year. And if you REALLY want to destroy a portfolio, buy the 25 stocks with the highest percentage change in debt. $10,000 consistently invested in those names fell to just $196! That’s a real average annual loss of -7.55 percent!
Bottom line—if a stock in your portfolio starts piling on debt, keep a watchful eye. If it finds itself in the two most expensive deciles, sell it. Oh, and if you want to get a good idea of names you might like to short, concentrate on the 25 stocks with the highest percentage change in debt because history suggests they are going down for the count. Below, you will find the relevant returns with draw downs and the 25 names from our All Stocks Universe with the highest percentage change in debt as of today.
