Avoid Debt-Drunk Stocks

In a prior blog, I told you I asked Sageworks, a financial research firm, to find companies that are not drunk on debt.

The idea being that, I wanted to find stocks that won’t be hurt by the credit crisis and won’t need to hoard cash to pay down debt in future periods. Which means they can use the money to grow their businesses, profits and your stock portfolios. Want proof that avoiding companies that are drowning in debt is one good way to approach stock picking? Shares in plenty of debt-aholic companies have flatlined over the years. Think Time Warner and the U.S. carmakers.

I also asked Sageworks to find the companies that are so waterlogged with high levels of debt that their earnings will likely be submarined and won’t resurface until after the downturn blows over.

Tim Keogh, a top analyst at Sageworks, crunched the numbers. Check out the stock ideas below.

- Low Debt Stocks Worth a Look-See

- High Debt-aholic Stocks to Avoid

Investors are now taking a closer look at companies' balance sheets to see if they have over-stretched and whether the Federal Reserve's 125-basis-point rate cut since last Tuesday will make it easier for them to pay down their debt. Even with the rate cuts, economists, mostly from Wall Street, are saying that the U.S. economy still may be headed into a recession.

The sub prime meltdown and the ensuing credit crunch has U.S. GDP growth stalling out, with growth at 0.6%. What’s hurting growth too is that debt is at record levels, and not just in our spendthrift government.

As of September 30, 2007, U.S. household debt was $13.6 trillion versus non financial business debt of $9.8 trillion, Reuters points out.

Fiscal stimulus footnote: George Cloutier, founder, chairman and chief executive of American Management Services, has some very good insights about how the government’s fiscal stimulus plan really won’t help small businesses.

For one small businesses won’t see the tax break on buying equipment take effect until they file 2009 taxes, at least 12 months away, Cloutier notes. He adds too that most small businesses earn less than $100,000 a year and won’t qualify for any meaningful tax breaks.