As we stand witness to the financial theater’s latest drama, let’s talk about the pandemic era’s darlings and their upcoming clash with a reality that is as unforgiving as a margin call on a bad day.
In 2021, companies like Peloton and Just Eat Takeaway, which became household names during the lockdown, feasted on the buffet of convertible bonds — debt with a chameleon-like ability to transform into equity, and all without the immediate fuss of interest payments.
Yet, as these zero-coupon bonds reach their metamorphosis phase, our market is not the nurturing cocoon it once was.
The scene is now set for a $69 billion repayment scramble over the next three years, a mountain that looks Everest-esque in the face of tightening monetary policies and a consumer base that’s tightening purse strings faster than you can say “recession.”
This presents an odyssey for growth stocks that have seen better days — days when staying home was the new going out and interest rates were as low as the world’s morale.
Here’s a nugget of wisdom from the trenches: companies typically court new financiers or negotiate terms at least a year before their debts mature.
And with the credit markets’ mood swinging faster than a day trader’s portfolio, high-yield corporates are facing a wall of costs that could very well have them pinned against the ropes.
Investors, let this serve as a reminder — debt is like seasoning; the right amount can enhance, too much can overwhelm.
For growth stocks, particularly those with a ravenous growth appetite but thin cash reserves, this environment is like walking through a minefield wearing snowshoes.
So, how do we, as investors, navigate this minefield without losing a financial limb?
It’s about discernment. Sifting through the rubble of the market’s recent tantrums, one can find opportunities.
Consider the convertibles now trading at discounts — some, like Beyond Meat, at fire-sale prices.
This is where financial strategy plays its part. Selecting bonds from companies with a Scrooge McDuck-esque cash reserve, even now, could be akin to buying beachfront property in the off-season.
Let’s not forget the cautionary tale of Peloton, once valued at a whopping $43.5 billion, now worth a shadow of its former self.
A conversion price of $239 when its stocks are limping around $4.30 is a sobering reality check. It serves as a stark reminder that yesterday’s exuberance can be today’s hangover.
For those with the stomach for it, there’s a play here.
Focus on companies with robust balance sheets, those that weathered the storm without sacrificing their financial umbrella.
Airbnb and DraftKings are names that come to mind, holding their ground amid the market maelstrom.
As we approach the debt refinancing horizon, the key for investors is due diligence.
Scrutinize balance sheets, dissect cash flow forecasts, and always — always — have an escape route planned.
Profitability is king, and a credible path to it is the kingdom.
With strategic investing, patience, and a keen eye for the undervalued, you can ride out this high-stakes game of financial musical chairs.
And maybe, just maybe, find yourself sitting pretty when the music stops.
Until next time,
Peter Burke
