One answer: Companies with a lot of debt and little operational leverage, according to a new report from Credit Suisse.Reuters
Strategist Andrew Garthwaite and team explain why companies like Sprint (S), American Water Works (AWK), Volcano (VOLC), Southern (SO) and Level 3 Communications (LVLT) could get hit by the taper:
Combining our view that bond yields are set to rise (making life more difficult for companies with high financial leverage), our caution on European credit and our expectation that economic momentum will accelerate lead us to the conclusion that sectors with both high financial leverage and low operational leverage – shown in the bottom right quadrant below – should be avoided.
Those sectors include telecoms, utilities, media, energy and tobacco companies, Garthwaite says. After screening for stocks with net debt to EBITDA greater than 2.5 times–a sign of financial leverage–free-cash-flow yields below 2%–a sign of little operational leverage–in defensive sectors and looking pricy, Credit Suisse came up with a list of 21 stocks that could be at risk, including the aforementioned Sprint, American Water Works, Volcano, Southern and Level 3 Communications.
Sprint has gained 2.5% today to $9.17, American Water Works has dipped 0.1% to $42, Sothern is off 0.4% to $40.83, Volcano has fallen 1% to $21.32 and Level 3 Communications is up 4.6% to $32.01.