New ways of thinking for today's markets
Debt helping some stocks to outperform
Companies that used debt and other forms of leverage to enhance growth outperformed the broad stock market over the past 12 months. Leveraged companies in the Credit Suisse Leveraged Equity Index, which includes firms that issue high-yield corporate bonds, posted a return of nearly 28% through September 2013, compared with a return just over 19% for the S&P 500 Index.
The equity of companies that use debt successfully to grow can appreciate quickly, particularly during periods of economic recovery when borrowing costs may be low.
"My big positions are self-funding and then some," reported David Glancy, a 25-year veteran of leveraged-company investing and portfolio manager of Putnam Capital Spectrum Fund and Putnam Equity Spectrum Fund. "High-cash-flow companies, which are a focus of leveraged-company investors, can more than offset the cost of their debt service and generate a higher return on the equity invested by shareholders."
With a competitive record relative to the S&P 500 Index, leveraged-company equities may be worth a look for investors seeking opportunities in companies using debt strategically.