It was fun while it lasted, but access to cheap capital has now disappeared for all but the highest-quality companies.
Investors no longer tolerate the kind of “profitless growth” that, because of record low interest rates, defined the 2010s. For proof, just look at the tech sector; some of these stocks, which were at all-time highs as recently as early 2022, are down more than 90%.
As bad as this market has been for these companies, the carnage isn’t finished yet. Dozens of these firms are essentially “drawing dead,” to borrow a phrase from poker, and they’ll soon be dead – bankrupt, at zero - if they can’t raise more debt or equity, very tough things to do in this market.
Refinancing and recapitalizing is a tall order right now because, as the Fed continues to keep rates high and all while removing liquidity from the market through quantitative tightening, capital costs five and six times what it did during the freewheeling, easy-money 2010s. All the while, these companies face declining margins; they may be forced to default on interest payments without the possibility of refinancing.
As these “zombie” companies run out of the cash needed to stay afloat, risk premiums will rise across the market, which could further squeeze liquidity and create an escalating, expanding series of corporate defaults.
Think of it as a “zombie plague,” only this isn’t sci-fi, but cold, hard reality. We’re already seeing the fallout. Bed Bath & Beyond Inc. (NASDAQ: BBBY) just alerted shareholders to the risk of insolvency; the stock is down more than 87% since August. Party City Holdco Inc. (NYSE: PRTY) had its “debt doomsday” in late January 2023 when it declared bankruptcy – its shares are off more than 93% over the past year.
That “performance” is noteworthy, and fundamental traders will know why. That’s because, if you focused on fundamentals, you could have made a fortune on these stocks as they hurtled lower.
Just take a look at the results of our “Zombie Hunt”…