Debt: Harshing Market's Mellow?

Given increased economic headwinds and the length of the market runup, it’s not surprising investors are flocking to what they hope will be steady-performing names. Year-to-date,* an estimated $13.4 billion has poured into exchange traded funds (ETFs) focused on low-volatility equities—making this category a top destination for factor investing dollars.
 
While stampeding toward what they hope will provide muted price movements, investors may be missing some key warning signs that could translate into painful bumps in the quarters ahead. Top among them is weakening balance sheets. A look at the chart below highlights how net debt levels relative to earnings before interest, taxes, depreciation and amortization (EBITDA) for companies in the minimum volatility ETF have skyrocketed and now stand at the highest point in the last 20 years. 
 
Source: FactSet Research Systems Inc., September 1999 to June 2019, quarterly
MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used to create indices or financial products. This report is not approved or produced by MSCI.
Past performance does not guarantee future results.

In the long run, we believe it’s not the volatility of share price that determines whether an investment is good, it’s valuations, the quality of the underlying business, and the strength of its balance sheet.

 

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Author

Heartland Advisors Value Investing Portfolio Manager Will Nasgovitz

Will Nasgovitz

Nasgovitz is CEO and Portfolio Manager of the Select Value, Mid Cap Value, and Value Funds and their corresponding separately managed account strategies. He also is CEO of Heartland Funds. He has 19 years of industry experience, 15 at Heartland.

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*August 16, 2019

Past performance does not guarantee future results.

Investing involves risk, including the potential loss of principal.

There is no guarantee that a particular investment strategy will be successful.

Value investments are subject to the risk that their intrinsic value may not be recognized by the broad market.

The statements and opinions expressed in the articles or appearances are those of the presenter. Any discussion of investments and investment strategies represents the presenters' views as of the date created and are subject to change without notice. The opinions expressed are for general information only and are not intended to provide specific advice or recommendations for any individual. Any forecasts may not prove to be true.

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As of 7/31/2019, Heartland Advisors, Inc. did not hold iShares Edge MSCI Min Vol USA ETF.

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