Below, you’ll find the latest market update and portfolio review from Porter & Co.’s Director of Distressed Investing, Martin Fridson. We release a full report with a new recommendation on the second Thursday of each month, and an update like this one two weeks later.
Marty also provides the “Top 3 Best Buys” – a regular feature that highlights what he views as the three most attractive positions to focus on in the portfolio, to help those who are new to distressed investing get started.
As always, please call Lance James, our Director of Customer Care, with any questions. You can reach him and his team at 888-610-8895, or internationally at +1 443-815-4447.
Experts’ opinions about the near-term risk of an economic downturn have been subject to frequent revision of late as the Trump administration has kept switching signals on tariffs. But stepping back from the day-to-day swings, we find that the consensus of forecasters surveyed by Bloomberg on the probability of a U.S. recession within the next 12 months has doubled from 20% to 40% since the end of 2024. Another potentially ominous sign is that the distress ratio (percentage of bonds in the high yield index yielding 10 percentage points or more above U.S. Treasury rates) is up from 4.15% to 7.37% over the same interval.
These shifts may induce investors to step up their allocations in “non-cyclical” industries. A caution is in order: In the distressed-debt sector, it’s essential to go beyond looking at labels such as “non-cyclical,” “defensive,” and “recession-proof.” Companies and whole industries seek that reputation, figuring it will boost their price-earnings multiples. The supposed non-cyclicals have logical-sounding stories about why their sales never flag when the economy slumps, but the evidence doesn’t always back up those stories.
Steady Performance Fables
One of the most enduring tales of invulnerability to economic fluctuations involves the motion picture industry. Last year Australian cinematographer Robert C. Morton wrote:
“The Great Depression of the 1920s and 1930s stands as a powerful testament to the industry’s endurance. Despite the widespread economic hardship that characterized this era, cinema attendance in the United States soared. Over 60% of the American population sought solace in movie theaters weekly, finding affordable entertainment and escapism from the grim realities of the time. In fact, during the worst years of the Depression, between 1929 and 1933, weekly movie attendance in the United States increased from 57 million to 70 million, according to historical data.”
All true, yet both RKO Pictures and Paramount Pictures went bankrupt during the Depression. Fox also became distressed and eventually merged with 20th Century Pictures, creating 20th Century Fox.
I recall that as the U.S. began to slide into recession in 1990, the corporate bond sales manager where I was working exhorted his troops to urge their accounts to buy electric-utility issues. “The economy may tank, but the lights aren’t going to go out. People have to keep paying their electric bills.”
Perhaps so, but Moody’s Investors Service global default rate records show default rates of greater than zero in 12 of the past 55 years. Eight of them weren’t even recession years.
A further examination of the Moody’s data reveals a 26.15% 10-year cumulative default rate (1970-2024) for a sector commonly considered non-cyclical – Consumer Goods: Non-Durable. If investment experts were asked to name a classically cyclical industry, Forest Products & Paper would probably come up before long. But Moody’s 10-year cumulative default rate for that group is 16.68%, more than a third lower than for consumer nondurables.
The bottom line: Take those stories with a grain of salt and cast a careful eye on the actual numbers. That entails more than reconstructing how a distressed company managed to stay current on its debt payments in the last couple of recessions. A thorough analysis includes intensive study of the company’s present balance sheet and operations to determine its chances of maintaining that record.
Few Businesses Thrive Through Numerous Business Cycles
Imperviousness to recessions is not entirely in the realm of mythology. Businesses such as The Hershey Company (HSY) and Coca-Cola (KO) have genuinely prospered through numerous business cycles over many decades. But those aren’t the kinds of companies that distressed investors get to select from. The often exorbitant yields of distressed bonds reflect a material risk that the issuers will in fact fail on their obligations and possibly file for bankruptcy.
Our distressed-debt recommendations don’t rely on stories about immunity to recession that may turn out to be fairy tales. No, not at all. Instead we roll up our sleeves, get our hands dirty, and might even invoke a couple of more clichés that describe rigorous analysis of companies’ financial leverage, maturity schedules, liquidity sources, and cash flows.
This content is only available for paid members.
If you are
interested in joining Porter & Co. either click the button below now or call our Customer Care Concierge,
Lance James, at 888-610-8895.
These shifts may induce investors to step up their allocations in “non-cyclical” industries. A caution is in order: In the distressed-debt sector, it’s essential to go beyond looking at labels such as “non-cyclical,” “defensive,” and “recession-proof.” Companies and whole industries seek that reputation, figuring it will boost their price-earnings multiples. The supposed non-cyclicals have logical-sounding stories about why their sales never flag when the economy slumps, but the evidence doesn’t always back up those stories.