Japans Lost Decade - The Zombie Economy

3 Zombie Companies that Will Destroy Your Money

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Zombie Stocks are Everywhere and Could Destroy Your Portfolio!

The zombie apocalypse is coming but it’s not at your front door, it’s in your bank account. Zombie companies threaten to not only destroy your portfolio but could trap the economy for decades.

In this video, I’ll explain zombie companies, show you what this means for stocks and then reveal a list of Zombie company stocks to avoid.

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What are Zombie Companies?

Nation, we can all breathe a sigh of relief that we made it through the god-awful Hollywood love affair with zombie movies and can get back to what really matters like vampire-werewolf-threesomes!

But just when you thought it was safe to go back outside, a new kind of zombie outbreak has started and this one is going right for your wallet.

I’m talking about zombie companies, businesses not even earning enough to make their interest payments. And normally the creative destruction that’s the hallmark of capitalism would put a company like this out of business. A company that can’t compete or earn a profit shuts down and the workers and resources it’s using go to a more profitable business…that’s how capitalism works, how it makes sure resources are being used in the best way possible.

But that’s not what’s happening right now.

How are Zombie Stocks Created?

The Fed has pumped over $4 trillion into the economy through different programs but largely with buying up the bonds of corporate America. And while it’s helped keep us out of a depression, it has created the biggest debt bubble in history. The Federal Reserve, the central bank responsible for guiding our monetary policy, is now investing in the debt of junk-rated companies…companies with questionable financials at best.

That $4 trillion money printing scheme has forced interest rates to zero and created a borrowing bonanza. March and April debt issues soared to $587 billion with just the first half of 2020 recording more corporate debt issuance than 16 of the last 20 years total.

And all this financial mumbo-jumbo may not seem like it matters but these kind of things have consequences. Real consequences that will affect the economy, your job and your finances for years to come.

The rock-bottom interest rates and easy money is keeping companies from filing bankruptcy. It’s a kind of financial life-support because even with no earnings, they can just borrow money to keep paying costs and interest on debt. They borrow new debt to pay off the old.

And in fact, we’ve seen this particular zombie movie before. Japan suffered through what’s called the lost decade though it really ended up being more like two decades where economic growth dropped to zero. Wage growth was zero or even negative for many workers and the stock market plunged 80% over the 13 years to 2003 and has never recovered.

Japans Lost Decade - The Zombie Economy
Japans Lost Decade – The Zombie Economy

Now the U.S. and even the global economy is facing its own lost decade and those consequences don’t look pretty. If interest rates increase, companies would find it impossible to refinance and a wave of bankruptcies is likely. That’s actually the best scenario because it would clear out a lot of the zombie companies and stocks. The hit would be quick, it would be painful but it would be over.

The other scenario would be similar to Japan’s experience. Twenty or thirty years of zero stock returns, negative wage growth and a walking dead economy.

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How to Find Zombie Companies to Avoid

Unfortunately, there’s not a lot you can do to stop this all from happening but you can protect your own investments by being able to recognize the worst of the Zombie companies. This means digging into a company’s financial statements to find the ones on that monetary life support.

You do this by looking at the income statement and I’ll show you three examples next. You want to look at the income statement and look for a company’s operating earnings, that’s going to be about a quarter the way down the report.

Now technically, most analysts will look at what’s called EBITDA or earnings before taxes, depreciation and amortization to compare against the interest expense. You can use either here, the operating income or the EBITDA, but what you’re looking at is whether that’s negative or positive and the trend.

Besides these core earnings, you’re also looking for the amount the company pays in interest expense each quarter. A company with earnings too low to pay dividends or reinvest is one thing but one that can’t even make enough to pay interest on debt is a walking corpse.

Searching through financial statements, most of these zombie companies right now are concentrated in those hardest-hit sectors during the pandemic. You’ve got a lot of oil companies and this is where many of the bankruptcies have already started with that crash from $60 per barrel to negative prices last spring. You’ve also got a lot of companies in travel, tourism and entertainment. Not all of these companies are in danger of turning full-blown zombie but the longer the pandemic lasts, the closer you need to watch your portfolio.

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3 Zombie Stocks I'm NOT Buying!

So I want to show you three examples of zombie companies and it’s not that these are doomed just yet but they’re definitely very high risk and you need to know how to spot them.

Our first Zombie Stock probably won’t come as a surprise, billion-dollar retailer Bed, Bath & Beyond, ticker BBBY.

Shares of the home furnishings retailer have been falling since 2013 with multiple turnaround attempts and hundreds of closed stores. A new CEO took over last November, offering a new turnaround strategy, but plans got postponed with the Coronavirus and the company is now in survival mode.

The company operates 1,500 locations across North America, many of which are in malls struggling to bring customers back. It’s estimated to have about 10% of the U.S. market share for home furnishings but that’s falling each year as more sales go online.

The company owns a lot of smaller brands like Cost Plus and BuyBuy Baby that it can sell off for quick cash but that’s only going to help for so long. Operating profits have been negative for the last five straight quarters and will likely see losses in the second and third quarter of this year as well. With over $4 billion in debt and climbing, it’s going to be a tough road to profitability in an environment that was already a nightmare for retailers.

I’m going to piss off a lot of Atlanta fans but billion-dollar Liberty Braves Group, ticker BATRK, is next on our list.

The publicly-traded owner of the Atlanta Braves gets most of its revenue from ticket sales, concessions and broadcasting rights…and that’s going to be a pretty slim business for a while.

Players reported to spring…summer training camp on July 1st with the season starting a few weeks after but teams will play just 60 games versus the usual 162 and teams will only play against others in their region. The league is leaving it up to each state whether fans can attend but even if stadiums do allow people in, it’s going to be at drastically low attendance, like 50% capacity.

Shares have actually done well since the 2016 IPO, rising about 70% over the period to December 2019 but limited revenue and $690 million in debt makes it tough to see any upside here.

The company posted six of the last ten quarters with negative operating earnings and even the four positive quarters didn’t leave much after paying interest on debt. If baseball isn’t 100% back to normal for the 2021 season…and that might be a longshot, but if it isn’t, this stock is going to strike out.

Even mega-cap companies can become zombies and $105 billion Boeing, ticker BA, is no exception.

Shares have been under pressure since February of last year and are now down 57% from the peak. The stock could get a sentiment boost late summer with a recertification of the 737 Max but it won’t help much if airlines don’t need the planes. American Airlines has already told the company it won’t take delivery of 17 planes if Boeing cannot offer financing for the purchase. That will mean Boeing Capital will have to secure financing itself to make the deal.

Three of the last four quarters have seen Boeing operational profit slide well below interest payments. The company has reported a loss of $6.3 billion over the last year plus the $860 million it’s paid in interest on debt. And it’s going to get worse before it gets better. Boeing borrowed a monstrous $25 billion in April on top of the $39 billion it already owed. That’s going to bring interest payments to about $2 billion a year and the problems for the major airlines means Boeing isn’t getting a lot of orders for a few years.

Another problem is the amount of money it’s going to cost to pay that interest and shrink debt means Boeing won’t be able to reinvest much into plane development for years. Airbus already has two planes in development that have no competition at Boeing and could mean the European giant eats away at more market share.

And before you say, “Well, the government would never let Boeing go under and file bankruptcy.” Just because a company files bankruptcy doesn’t mean it stops operations. The aerospace giant could still operate even after it wipes out shareholders and even if it escapes bankruptcy, the shares could be dead money for years.

Zombie companies are a risk after every economic recession and the amount of money pumped into the system this year means it's going to be even worse. Companies that cannot make a profit are being held on fiscal life support. It will hold back economic growth and could hold back your portfolio.

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