Commodities, debtors may benefit from easy money
The Federal Reserve’s action last week to enlarge the money supply will bolster some stocks and hurt others.
Twice in the past two years, the central bank has initiated large open-market purchases of government bonds. What it does twice it can do three or four times, if it thinks it needs to inject more money into the economy.
An easier-money climate may produce some inflation — and that would be just fine with the Fed. It would like a touch of inflation, mainly to reduce the risk of deflation.
Standing to gain from easier money are companies that have borrowed money through long-term loans or bonds. The longer the duration of their debt structure, the more they could benefit.
Other beneficiaries of inflation are companies that produce commodities.
Among the commodity producers that may emerge as winners are Reliance Steel & Aluminum Co., W&T Offshore Inc., and Hecla Mining Co.
Reliance Steel, based in Los Angeles, processes and distributes steel, aluminum and other metals.
Reliance has $350 million in bonds maturing in 2016 and an additional $250 million maturing in 2036, so it may benefit from being able to pay bondholders back with cheaper dollars as the years pass.
W&T Offshore Inc. of Houston is a small oil and gas producer focused on the Gulf of Mexico. The past two years have been a struggle for the company. It lost money in 2008 and 2009. This year analysts believe it will return to profitability.
That doesn’t mean the analysts like W&T stock. They pretty much hate it.
The contrarian in me likes that situation. And the cheapskate in me likes W&T’s valuations. At seven times earnings, people clearly aren’t expecting much from this company.
W&T’s debt is equal to 99 percent of its equity, so it could benefit from the Fed’s indirect rate relief.
Hecla Mining, based in Coeur D’Alene, Idaho, produces precious metals such as gold and silver. It has mines in production in Alaska and Idaho, and is developing projects in Colorado and Mexico.
Last year the company’s revenue was $313 million and it earned about $68 million in profit.
Hecla is nearly debt-free. However, it might see the prices of its metals soar relative to the dollar.
To find some companies with a debt structure that might benefit from a cheapening dollar, I ran a screen.
Normally I prefer low debt. For this exercise I looked for companies that have higher debt but possess all the other characteristics I normally seek.
The most intriguing company to pop up was International Business Machines Corp. The company had an eye-popping 74 percent return on equity last year. Its earnings per share growth is impressive.
Yet it does have lots of debt. The computer maker’s total long-term debt is almost $22 billion, which is 123 percent of equity. Of that total, $3 billion will be due in 2017, $1.6 billion the next year, and $1.5 billion in 2039.
With that debt structure, IBM seems like an excellent candidate for the Fed’s program of indirect debt relief.
The companies most hurt by the Fed’s easing program, it seems to me, will be lenders.
One bank I would stay away from is Zions Bancorporation, based in Salt Lake City. I would be wary of Regions Financial Corp., located in Birmingham, Ala.