How To Find Stocks That Can Handle High Interest Rates

How To Find Stocks That Can Handle High Interest Rates
Stéphane Renevier, CFA

5 months ago2 mins

Mentioned in story

Let’s face it: some companies are going to have a tougher time with these higher interest rates than others. And you’re going to want to find the ones that can more easily weather this higher-for-longer storm. So here are three vital things to look for:

Low net leverage: Companies with a lower net debt to earnings before interest, depreciation, and amortization (EBITDA) ratio essentially owe less money, have decent cash on hand, and enjoy strong profits. This positions them well against rising interest rates because they have fewer loans that might need to be refinanced at these higher rates. What’s more, having a good amount of cash and profit acts as a safety net: it not only gives them more wiggle room in their operations but also makes them seem more trustworthy to investors, as they appear more financially stable and less risky.

High interest coverage: Companies with high earnings before interest and taxes (EBIT) to their interest expenses have a greater ability to cover their interest expenses with their earnings. This means they can comfortably pay off the interest on their debt without straining their finances.

Low EBITDA growth variability: Companies with low EBITDA growth variability tend to have steady and reliable earnings. This stability means they can better weather economic ups and downs or any operational speed bumps. If borrowing costs increase, these companies can lean on their consistent earnings to manage the added costs. Plus, with predictable cash coming in, there’s less chance of unexpected financial setbacks. This reliability not only makes companies more resilient but also more appealing to investors who value stability, which should support their prices.

Goldman Sachs crunched some numbers based on those three factors, and identified a list of companies that are poised to be the most resilient in the face of rising borrowing costs.

At the top of the pack are Cisco, Costco, Paychex, Cadence Design System, Cognizant Technology Solutions, Visa, and Fastenal. These champs boast negative net leverage, indicating they’re swimming in more cash than debt. Plus, their EBIT stands tall, between 35 and 90 times their current interest expenses, signaling a strong position to cover interest dues. And their profit fluctuations are at least half as wild as the average S&P 500 company, which suggests stability.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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