In a world turned upside down by the pandemic and awash in cash, investors appear to be pouring money into some stocks with the worst balance sheets.
“Imagine for a moment that a portfolio manager describes their investment process as follows: they focus exclusively on companies with deteriorating or questionable business prospects, and lots of debt. They go on to highlight their fondness for companies that make poor use of invested capital, and experience large selloffs during periods of stress, said Jonathan Golub, chief equity strategist at Credit Suisse, in a Tuesday note.
Though that might sound farcical on its face, but Golub says this strategy would have racked up impressive gains since Pfizer Inc. PFE, -0.44% begame the first to announce its COVID-19 vaccine candidate had proven highly effective against the disease in November.
The subsequent spate of positive vaccine developments has driven investors into shares of smaller and more indebted companies at the expense of firms with more robust finances, reflecting how stocks that missed out on early gains from the equity rally that followed last March’s sharp plunge at the onset of the pandemic, were now playing catch up, as the chart below shows.
Even the energy industry, under pressure from increasing regulatory scrutiny, has shown signs of bouncing back.
The aversion to safety also has been mirrored in corporate credit markets.
Below investment-grade debt with the lowest credit ratings have enjoyed strong gains in January, opening up issuance for even the junkiest of bonds.
The yield for a basket of sub-investment grade corporate bonds were at their lowest on record, trading at 4.12% on Tuesday, down from their March peak of 11.38%. Bond prices move in the opposite direction of yields.