Canadians have opted out of the trend of investors punishing debt-heavy companies in favour of those with more-pristine balance sheets.
Data from S&P Global Market Intelligence suggests many stocks of companies with weaker balance sheets have outperformed the S&P/TSX composite for the year and in the current quarter, unlike the phenomenon identified recently by Bloomberg News and some Wall Street research firms.
Globally, stocks with the lowest debt-to-equity ratios are outperforming those with the highest ratios, according to a Bloomberg story last week. The news agency also cited a recent report from Goldman Sachs that said U.S. stocks with strong balance sheets are outperforming those with the weakest, with the ratio between the two groups near the highest in four years.
However, data suggest Canadian stocks aren't part of the pattern.
To see how Canada matched up, we identified companies in the S&P/TSX 60 with the heaviest and lightest debt loads at the end of the Sept. 30, 2016, quarter. We used debt-to-equity percentages, as listed in the S&P database, and classified one with more debt than shareholders' equity as the heaviest, and those with percentages of less than 34 per cent (less than half the median figure) as the ones with the lightest debt loads.
(Why the Sept. 30 quarter? If you decided to buy stocks on Jan. 1, 2017, based on balance-sheet data, that would be the freshest numbers you'd have, because Dec. 31 balance sheets hadn't been disclosed.)
Of 15 "debt-heavy" companies, 12 have beaten the broader composite's 4.69-per-cent return so far in 2017, with 10 posting double-digit returns. The group includes turnaround stories such as Bombardier and a number of energy companies.
But of the 14 "debt-light" companies, just four have beaten the index.
The best balance sheets have done a little better since Sept. 30, 2017, a period we picked to examine whether there's a "growing preference" for stronger balance sheets, as the Bloomberg story suggested. Of the 15 debt-heavy companies, there were 11 that have outperformed the composite so far this quarter. However, eight debt-light companies have beaten the benchmark since Sept. 30, double the number of the year-to-date group.
Are Canadian investors simply late to favour better balance sheets? If you believe so and think a healthy balance sheet will be a key predictor of outperformance in the coming weeks and months, we've provided you a cheat sheet of the S&P/TSX 60 with the smallest debt-to-equity percentages as of the most recent quarter.