Until not that long ago, it seemed any debt was good debt -- such was investors' thirst for yield. However, the past weeks have proven once again that high-quality debt is better, and low debt best.
With inflation appearing to have bottomed out, the prospect of an end to central banks' largesse has brought the issue of debt sharply in focus. Last Thursday, outflows from the top-ranked junk bond ETF by assets, the iShares iBoxx High Yield Corporate Bond (HYG) , almost reached the $1 billion mark -- the largest withdrawal on record, according to Bloomberg.
Investment-grade bond ETFs also have seen outflows in a sign that investors for the moment are put off of any kind of debt amid jitters about the possibility of a Fed rate hike and increased uncertainty about inflation.
In Europe, particularly in the eurozone, corporate debt still can be considered a protected asset because of European Central Bank (ECB) purchases. But even there, investors would do best to look for companies that do not have a lot of debt.
France, the eurozone's second-largest economy, is often dismissed as a sluggish, bureaucracy-ridden country of prolonged holidays and repeated strikes. But investors going beyond the prejudice should take a closer look at French companies to identify stocks that may offer growth potential going ahead.
Besides adding diversification to investors' portfolio, French stocks could have another advantage: They may be relatively cheap to buy right now for U.S. investors, because a hawkish Fed is likely to give the dollar's exchange rate a lift versus the euro.
Data released on Wednesday add another reason for investors to look at French stocks: The manufacturing sector showed solid growth in October, with output increasing at its fasted pace in 31 months. (Details about the eurozone manufacturing PMI for October can be found in this story )
The manufacturing Purchasing Managers' Index registered 51.8 in October in France, stepping into expansion territory for the first time in eight months. New orders rose in October, ending a nine-month period of contraction, while new export orders rose at their fastest pace since March 2011.
Analysts at Societe Generale, in a research note about the effects of the ECB tapering its quantitative easing program, identified stocks across the eurozone that have more cash than debt on their balance sheets and an interest cover (expressed as earnings before interest and tax (EBIT)/interest expenses) above 20x.
Three of the French stocks on their list have ADRs, which makes it easier for U.S. investors to access them. Here they are:
Thales (THLEY) is an engineering group headquartered in Paris that makes electronic equipment for the defense, aeronautics and maritime sectors. FactSet data show it had cash and short-term investments valued at €3.6 billion ($4 billion) vs. long-term debt of €1.4 billion. Year to date, the more liquid Paris-listed shares gained more than 22%. Interest cover is 88x.
Dassault Systemes (DASTY) is a provider of software solutions and consultancy that has been specializing in 3-D design, engineering and modeling. Its stock has lost more than 3% year to date, with investors disappointed by lower-than-expected increases in new license sales.
Still, the company upgraded its earnings guidance for the end of the year and it has €2.6 billion of cash and short-term investment vs. long-term debt totaling €1 billion. It comfortably can afford its debt, with interest cover of 22x.
The third one is the media and telecommunications giant Vivendi (VIVHY) , the owner of Universal Music Group and the Canal+ Group. Year to date the stock lost about 8%, but it has perked up over the past three months, when it has gained more than 4%.
In the quarter ended in June, Vivendi's cash and short-term investments were €6.5 billion, with long-term debt at €2.2 billion.