I hope you and your loved ones are staying healthy and safe.
What a crazy experience this has been, as we all learn to cope with a global pandemic and all of the ways our lives change because of it.
Here at the Scheidt house, we’re helping the kids log on to “Google Classroom” so they can start learning from home. And we’re watching carefully for any sign of the virus.
So far, so good!
Of course, the market has been in turmoil as investors worry about the economic effect that all of this “social distancing” will have on our country’s businesses.
Today, I want to take a few minutes to help you determine which of your stocks are down temporarily because of the market fear, and which ones actually have more significant issues that you need to be wary of.
So let’s jump in!
All About Short-Term Survival
By now, I’m sure you’ve seen the discussion about “pushing out the curve” of coronavirus contraction.
The concept here is to slow the spread of the virus, which buys more time for hospitals to treat people with the limited space available. And slowing the spread of the virus also gives us more time for scientists to find a vaccine — or at the very least a cure for the symptoms — of this new virus.
When it comes to the stocks you’re invested in, there is a similar curve — or time issue — that is important to keep a close eye on. And if you do a little research, you can quickly determine if this coronavirus issue represents a short-term challenge for your company, or a longer-term hurdle that could severely impact your wealth.
Let me explain…
I’ve heard smart investors tell me that for many companies, this is a debt issue rather than an overall business issue.
The problem for some companies is that they’ve spent the last several years borrowing money and taking on large debt levels.
This is all well and good when rates are low and there’s plenty of cash coming in to cover interest payments.
But if customers start practicing “social distancing” and don’t show up for a few months, all of that debt becomes a huge problem. And companies that can’t cover the interest payments may have to declare bankruptcy.
See, in time this virus issue is going to be solved. I’m confident of that.
And when that happens, it will be “back to business as usual” for most of the companies you’re invested in.
But in order to get to that “business as usual” spot, companies have to be able to cover their obligations between now and then.
So as investors, it’s important to look carefully at the financial picture for the stocks we’re invested in.
Fortunately, that information is available — for free — to all investors.
You just have to know where to look!
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EDGAR: A Great Public Resource
One of the best places to find information about a company’s financial position is through the SEC’s EDGAR service. (EDGAR stands for Electronic Data Gathering Analysis and Retrieval). You can reach the site at SEC.gov/Edgar.
From there, you can use the search bar at the top right of the page to find your company.
Today, we’ll use Microsoft Corp. (MSFT) as an example so you can see some screenshots of the information available. I typed “Microsoft” into the search bar and then clicked on the link for “Microsoft Filings on EDGAR”
Here’s a quick screenshot of what came up!
It’s a list of all the reports that Microsoft has filed with the SEC. In particular, we’re looking for “10-K” (which is the code for an annual report) or “10-Q” (which is code for a quarterly report). You can see I’ve circled the 10-Q link above.
From here, click on the “Interactive Data” link for the 10-Q and you’ll be taken to a page that has all of Microsoft’s most recent quarterly information.
Since we’re looking for Microsoft’s debt position and how well it can pay for its debt over the next year, I would then click on the “Balance Sheet” button on the left side of the page.
Check it out in the screenshot below…
Now, there are two very important sections that I have circled that we’ll be paying close attention to in today’s climate.
First is the company’s “Total cash, cash equivalents and short-term investments” — This is basically how much cash Microsoft had at its disposal when the quarter ended on December 31st. You can see the number is a healthy $134 billion.
Now, if you look farther down the page, you’ll see a heading titled “Total current liabilities” — this number represents the amount of debt (or liabilities) Microsoft must pay in the next 12 months. At the end of last quarter, the figure was just under $60 billion.
These two numbers give me a lot of confidence for Microsoft!
What the balance sheet is telling us is that Microsoft has more than two times enough cash to pay for its liabilities this year. Which means we can be a lot more confident that Microsoft will make it through this challenging coronavirus period unscathed.
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Now of course there are plenty of other details to be aware of and research.
It would be helpful to know how much revenue the company brings in each quarter, what it’s payroll costs are, how many customers the company is adding or losing during this tumultuous period and so forth.
These are the questions my team and I pour over on a day-to-day basis, helping us to find the best income opportunities for you to invest in day in and day out.
And I will tell you, the more you know about these measures and how they affect your company, the more skill you’ll have as an investor.
But you don’t have to figure out all of those details right away. One of the best things you can do right now is simply to look at the balance sheet for every one of your investments, and compare the company’s cash with their current (or short-term) liabilities.
And that’s not too difficult at all!
I hope this exercise helps you feel a bit more comfortable with your investment portfolio, and your ability to weather this temporary challenge.