There’s another market crash on the way.
“We are in a bubble,” says legendary investor Jeremy Grantham, “but it is unlike any other.” He believes the bubble should pop within months, or even weeks.
“The stories are everywhere and are what you need for a bubble to break,” Grantham concludes.
If another market crash is on the way, the time to prepare is now. You definitely don’t want to be owning stocks like the ones below. But even if you don’t own these specific stocks, pay close attention, as you may own similar companies that could send your portfolio value plunging.
Don’t bet on high-debt companies
Companies that have a ton of debt don’t do well when markets crash. The numbers get scary quick. That’s because debt payments are fixed payments. No matter where the market goes, you still own the same amount each month.
The problem is that when markets fall, lenders get nervous; they pull back, which makes it hard for companies to source new funding to pay off their existing debt. Their only other option is to sell stock, which they must now do at deeply discounted prices, diluting shareholders. It’s a lose-lose situation.
Enbridge currently has US$68 billion in long-term debt. That figure doesn’t even include short-term borrowings. Four years ago, it had just US$40 billion in debt, so liabilities have grown over time. That’s a problem given that the company’s market cap has shrunk over that period, and now stands at just US$66 billion.
When the coronavirus crash first occurred in March, oil prices slid from US$60 per barrel to US$40 per barrel. That’s a problem for Enbridge considering all of its customers are financially reliant on high oil prices. If its customer base struggles, revenues could dip. With a gigantic amount of fixed debt payments, things could get ugly fast.
When markets falls, avoid highly leveraged businesses like this.
These stocks will die if markets crash
Airlines are capital-intensive, which means they need to reinvest a ton of cash simply to stay afloat. Managing a global fleet of aircraft isn’t cheap. So when demand fell 95% in March, the entire industry was thrust into chaos.
The problem is that the crash is still occurring for airlines. Demand remains 90% lower than 2019. The losses are enormous. Air Canada is on pace to lost $4 billion this year. That’s half its current market cap!
To plug the gap, it’s been borrowing a huge amount of money. Debt levels have skyrocketed, and shareholders have been steadily diluted. If the entire stock market crashes again, these financial lifelines may disappear. Investors may be unwilling to subsidize losses endlessly. If that happens, Air Canada may go bankrupt within months.
There are usually some winners in every industry, but I’d avoid airline stocks altogether right now.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
The Motley Fool owns shares of and recommends Enbridge. Fool contributor Ryan Vanzo has no position in any stocks mentioned.