Companies with high levels of short-term debt have been getting hit especially hard during the recent stock market sell-off and thus could present great buying opportunities later, according to Goldman Sachs strategists.
Overnight borrowing rates have been surging lately, hitting the highest level since 2009, or just as the financial crisis-era bear market was hitting its low point. The three-month overnight borrowing cost, known as the London Interbank Offered Rate, or Libor, has risen to about 2.3 percent.
As short-term rates have risen, companies with floating-rate bond debt amounting to more than 5 percent of total debt have underperformed the S&P 500 by 3.2 percentage points.
Investors should keep an eye on these companies, Goldman advised. The rise in the Libor rate should subside, just as it did during a surge in 2016, providing an opportunity, the firm said.
"These stocks should struggle if borrowing costs continue to climb, but may present a tactical value opportunity for investors who expect a reversion in spreads," strategist Ben Snider said in note to clients.
Among the companies most affected by the rise in rates: Stanley Black & Decker, which has 27 percent of floating rate debt as compared with total debt; Vulcan Materials (26 percent), Campbell Soup (23 percent), Colgate-Palmolive (21 percent), Martin Marietta (20 percent) and Textron (17 percent).
More broadly speaking, Snider pointed out that small-cap stocks in general tend to carry more floating rate debt, making the sector an attractive bet for a rebound.
However, over the long haul Goldman still recommends investors focus on companies with strong balance sheets and lower levels of debt. The Federal Reserve has indicated it will continue to raise its benchmark interest rate over the next couple of years, pressuring companies that have relied on low debt costs to finance operations.
"Apart from the dislocation in short-term rates, the macro landscape is growing increasingly unfavorable for highly levered companies," Snider wrote. "As the cycle matures, borrow costs should continue to rise and earnings power should soften, exacerbating leverage ratios and weakening both interest coverage and the ability to issue new debt."
Goldman also recommends bond investors focus on companies with investment-grade credit rather than high-yield, or junk.