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"Zombie" stocks are proliferating – and one or more could be lurking in your portfolio.
These stocks to sell are companies trapped by their own debt. In short, their profits aren't enough to cover their debt interest payments. And in a rising interest rate environment like the one we're in now, the zombification will keep getting worse.
According to the Bank of International Settlements, the number of these dead firms walking is on the rise.
A BIS report released in September said the prevalence of zombie stocks in 14 advanced economies had zoomed from about 2% in the 1980s to about 12% by 2016. In the United States, the number of zombie firms doubled between 2007 and 2015, to about 10% of all publicly traded companies.
Another red flag is the declining quality of corporate debt. The number of advanced-economy companies with investment-grade debt has dropped by half since 2000. Zombie companies are a major contributing factor to this disturbing statistic.
Urgent: This catastrophe could bring the U.S. economy to its knees – and make the Great Recession seem like a day at the beach. Read more…
The problem now is that a one-two punch – a slowing economy combined with higher interest rates – could push many of these companies toward default.
This is a problem that's been building for years…
Where Zombie Stocks Come From
The seeds of this looming "zombie apocalypse" were sown in the financial crisis of 2008. That's when central banks began reducing rates to historic lows.
The allure of cheap money was too much for many companies to resist, even those with already-shaky balance sheets. And as long as rates remained low, the interest payments on all that debt was manageable.
Now that rates are rising, the zombies are about to be exposed. According to UBS research, economy-wide interest payments will increase by 7 to 8% this year – requiring an equivalent increase in income to cover added expense.
Zombie companies are always bad for an economy – they draw capital and resources into unproductive firms that would generate better returns if invested in healthier companies.
But if they start to fail, zombies can inflict even more damage. The failure of zombie firms that owe large amounts of money creates a systemic risk that will create havoc as both investors and creditors get slammed with massive losses.
Clearly, investors want to avoid buying any zombie stocks. But the BIS report didn't name names, it only listed the criteria it used. Companies that fit the definition of "zombie" were those that were at least 10 years old while being unable to cover their debt payments with their profits (a debt coverage ratio of less than 1.00).
At Money Morning, we realize investors need actionable information. So we did a deep dive using the same basic criteria as the BIS and uncovered nine familiar stocks that could very well be lurking in your portfolio. We also found some "near-zombies" that are just as risky.
You may be aware of the struggles of some of these firms. But several will surprise you. And if you own any of these stocks to sell… you're going to want to know about it sooner rather than later.
Take a look…