The saga of Bed Bath & Beyond (BBBY) has finally come to a bitter end.
Last month, the retailer – known for mailing out its beloved 20% off coupons – finally called it quits and filed for bankruptcy.
Bed Bath & Beyond was one of the “meme stocks” that speculators liked to gamble on.
Even as reports of an imminent bankruptcy surfaced, traders with an appetite for risk and looking to make a quick buck piled in.
Well, their bets amount to a big fat zero now.
And Bed Bath & Beyond isn’t the only company closing its doors. Many unprofitable “zombie companies,” which were kept alive by cheap debt, can no longer afford to keep running with higher interest rates.
Here at Intelligent Income Daily, we’re focused on finding the safest income investments on the market. And right now, we must be extra careful with our selections.
With a looming recession, uncertainty about a debt ceiling crisis, and inflation still not under control… consumers are holding back on spending. And that’s led to a wave of bankruptcies wiping out weaker companies.
Today, I want to show you one way to check on the financial health of your investments. Then I’ll explain why certain types of businesses are more vulnerable to recessions, and which sectors you should look at because they are more likely to stay afloat.
A Bankruptcy High Not Seen in a More Than a Decade
We reached a grim milestone last month.
According to S&P Global, there have been 236 corporate bankruptcies so far this year. That’s more than double their number last year and the highest tally since 2010… And we’re only halfway through the year.
One of the big reasons so many companies are starting to file for bankruptcy now is because of the rapid increase in interest rates over the past year.
A year ago, the Fed’s short-term interest rates were set at under 1%. Now it’s over 5%.
A business that’s barely making it with 1% interest almost certainly can’t handle paying five times more to cover its debt.
That’s why one important metric to check when looking at the financial health of a company right now is something called the interest coverage ratio.
You can calculate the interest coverage ratio by dividing a company’s earnings before interest and taxes (EBIT) by the total interest expenses.
For most companies, a healthy interest coverage ratio is at least 2. The higher, the better.
If the interest coverage ratio falls below 1, that’s a big warning sign. It means the company isn’t making enough money to cover its interest payments. It doesn’t always mean the company will go bankrupt. But it does mean you should pay closer attention to its financial situation.
There are two main factors that affect the interest coverage ratio. The first is how much total debt a company has. That usually doesn’t change very quickly.
But the second factor is the company’s earnings. And depending on the type of business it’s in, a company’s earnings can change in an instant.
That’s what we saw with Bed Bath & Beyond…
You Don’t Need to Make Risky Bets Right Now
Now, when interest rates are rising and a recession hits, certain sectors are more vulnerable than others.
Manufacturing slows down, affecting demand for energy, materials, and industrial companies. And aside from those industries that may seem obvious – one sector in the consumer space is most sensitive to sudden changes in earnings: Consumer Discretionary.
Those are businesses that sell things you don’t really need but are nice to have. Things like new clothes, eating out at restaurants, or going on vacations. These are the first things people stop paying for when money is tight.
On the other hand, there are some expenses you just can’t put off: paying for food and utilities or taking care of your health. And those are the industries that survive.
That’s why sectors like Consumer Staples, Utilities and Healthcare tend to have stable earnings even during recessions. And they tend to hold up better when the market sells off.
Here’s how different sectors performed during the Great Recession in 2008:
So next time you’re looking for a way to grow your wealth, ditch the hype and get-rich-quick promises. And that’s more important now than ever.
To keep your finances safe with companies that are built for difficult times, consider the three sectors on the left-hand side of the chart above.
One quick way to get portfolio exposure to these defensive investments is through sector ETFs. Here are three that cover the recession-resistant sectors I mentioned: Consumer Staples Select Sector SPDR Fund ETF (XLP), Utilities Select Sector SPDR Fund ETF (XLU), Health Care Select Sector SPDR Fund ETF (XLV).
Now, our bread and butter at Wide Moat Research is income. And many of the most reliable dividend-paying companies can be found in these sectors.
Right now, our Intelligent Income Investor portfolio is full of companies that produce goods people will need in all market conditions – many of which are trading at a discount. Which makes it a great time to add these names to your portfolio and keep your wealth growing.
To find out the names of these individual plays, click here to learn more.
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily