Double the S&P With This Metric

July 14, 2023

Talk about spin…

I started my morning as I usually do… holding a fresh cup of coffee while combing through the latest financial reports… when a surprising headline caught my attention.

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Intrigued, I started to read the report.

After a few opening lines on what the index is all about (measuring small business optimism, if you couldn’t tell), I came to this chart…

Now, I’m usually pretty good at reading charts. But this one had me scratching my head.

Where, exactly, is this newsworthy high?

I failed to spot it. But, luckily for us, a second chart helpfully zoomed in on the past 12 months.

Oh, I see. With a magnifying glass in hand, the rising sentiment is plain as day.

But the much plainer truth is that small business optimism is uncomfortably low.

You don’t need to look any further than the above charts for evidence. Even the report itself admits, “This marks the 18th consecutive month the index has been below the series average of 98.1.”

To me, this is more telling than the headline. So why hide it?

You know the answer…

There is a growing bias against uncomfortable facts. I’m sure you’ve noticed it too. It’s difficult to uncover the real story with headlines like the one above floating around.

The truth is, our economy is not healthy. And anyone who’s paying attention knows it.

While inflation might be a dead horse topic in the average newsroom, it’s alive and well at the average kitchen table. Americans are putting more on their credit cards – and at a faster clip – than at any time since the turn of this century.

Worse still, we’re charging at unbearably high interest rates – higher than we’ve seen in decades…

These facts don’t make us feel good. But at least they tell us something useful.

You see, businesses borrow money too.

And given the facts that small business sentiment is poor and consumers are debt-ridden, I’d much rather place my cash in businesses that can more easily weather a potential economic storm.

That means asset-rich, debt-poor companies.

As it turns out, there are only a handful of S&P 500 companies that have a debt-to-equity ratio of 0.1 or lower. Here’s the full list…

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You’ll notice that, on average, they’re more than doubling the S&P 500’s performance this year – the broad index is up about 15% as of this writing.

And, crucially, they’re doing so with relatively little debt on their balance sheets.

Isn’t that something?

You see, there’s no need to be scared of the facts.

There’s a reason many of the most famous investors in history have been contrarians. They’ve been willing to follow the facts… even to a fault… when the crowd has lost its taste for truth.

We like that approach here – it’s the only one that works.