Close

Thought Leadership

Quality Matters

In constructing our US portfolio, one of the first screens that we perform on the S&P 500 is to exclude companies with non-investment grade debt. In order to be considered an investment grade issue, the company must have a credit rating of BBB or higher by Standard and Poor’s or Moody’s.

The simple screen shrinks our opportunity set to focus on companies with stronger balance sheets with appropriate amounts of debt. While taking on debt can be useful for companies to access capital and invest in the growth of their business, it can also be a burden if growth plans do not play out as expected. Companies are left with interest payments and obligations that can weigh on them and their ability to grow for years to come. The weight of these burdens become heavier in economic recessions.

In a recession, like the one brought on by the COVID-19 crisis, companies get squeezed as their revenues decline on the back of a weaker economy. Companies with weaker balance sheets are more susceptible to a bigger drawdown on their stock performance as they continue to have to pay their fixed expenses with lower revenues and face higher borrowing costs on account of their lower credit rating.

It is no surprise when looking at the graph below that through the COVID-19 crisis companies with better credit ratings have performed better.

Performance of S&P 500 Companies by Credit Rating

January 1, 2020 – May 15, 2020

Source: Citi Equity Trading Strategy (CETS), Bloomberg

Important disclosures

Disclaimer: This is presented for illustrative and discussion purposes only. It should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities and it does not consider unique objectives, constraints, or financial needs of the individual. Under no circumstances does this piece suggest that you should time the market in any way or make investment decisions based on the content. Investors are advised that their investments are not guaranteed, their values change frequently, and past performance may not be repeated. References to specific securities are presented to illustrate the application of our investment philosophy only, do not represent all of the securities purchased, sold or recommended for the portfolio, and it should not be assumed that investments in the securities identified were or will be profitable and should not be considered recommendations by Bristol Gate Capital Partners Inc. The information contained in this piece is the opinion of Bristol Gate Capital Partners Inc. and/or its employees as of the date of the piece and is subject to change without notice. Every effort has been made to ensure accuracy in this piece at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and Bristol Gate Capital Partners Inc. accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Data and information for this report were sourced from Citi Equity Trading Strategy (CETS) and Bloomberg. We strongly recommend you consult with a financial advisor prior to making any investment decisions. Please refer to the Legal section of Bristol Gate’s website for additional information at www.bristolgate.com.

A Note About Forward-Looking Statements

This report may contain forward-looking statements including, but not limited to, statements about the Bristol Gate strategies, risks, expected performance and condition. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events and conditions or include words such as “may”, “could”, “would”, “should”, “expect”, “anticipate”, “intend”, “plan”, “believe”, “estimate” and similar forward-looking expressions or negative versions thereof.

These forward-looking statements are subject to various risks, uncertainties and assumptions about the investment strategies, capital markets and economic factors, which could cause actual financial performance and expectations to differ materially from the anticipated performance or other expectations expressed. Economic factors include, but are not limited to, general economic, political and market factors in North America and internationally, interest and foreign exchange rates, global equity and capital markets, business competition, technological change, changes in government regulations, unexpected judicial or regulatory proceedings, and catastrophic events.

Readers are cautioned not to place undue reliance on forward-looking statements and consider the above-mentioned factors and other factors carefully before making any investment decisions. All opinions contained in forward-looking statements are subject to change without notice and are provided in good faith. Forward-looking statements are not guarantees of future performance, and actual results could differ materially from those expressed or implied in any forward-looking statements. Bristol Gate Capital Partners Inc. has no specific intention of updating any forward-looking statements whether as a result of new information, future events or otherwise, except as required by securities legislation.

News & Insights

LET’S STAY IN TOUCH

Learn about News, Events and how we are using Data Science to eliminate human bias.