Investors should look for new tools … especially in a high-risk market like we have today.
After all, the tools they rely on probably didn’t help them avoid the crash.
One new idea you should consider is using credit ratings to evaluate stocks.
That’s because changes in a company’s outlook are a hint that its rating could change.
And that knowledge can help investors find safe stocks in dangerous sectors.
Avoid Risk With This Easy-to-Use Tool
A recent report from Standard and Poor’s offers insights into the probability of default (PD) for high-yield bonds. These are often called junk bonds.
Analysts found a 23.6% PD of junk bonds issued by airlines. Oil and gas company bonds have a 22.5% PD.
This doesn’t mean you should avoid all the companies in these sectors, however. It just means you should consider avoiding companies with low credit ratings.
A credit rating is like a consumer’s credit score. Higher ratings indicate a lower PD.
To find credit ratings of companies, you can use Moodys.com. The bond rating agency provides an overview of its ratings with free registration.
For example, searching for Chevron Corp. (NYSE: CVX) provides a table shown below.
The long-term rating of “Aa2” means Chevron’s bonds “are judged to be of high quality and are subject to very low credit risk.”
The short-term rating of “P-1” means Chevron has “a superior ability to repay short-term debt obligations.” It’s the highest rating possible.
And finally, an outlook of “Stable” “indicates a low likelihood of a rating change over the medium term.”
These factors tell us that despite the oil industry’s problems, Chevron offers high-quality bonds with low risk.
For more information on Moody’s rating system, you can check out this helpful guide.
Look at These Sectors for Safe Income
While Standard and Poor’s highlighted sectors with high risk, the news wasn’t all bad.
It noted that the PD of health care REITs fell to 0.52% in March. REITs are real estate investment trusts, which usually offer high dividend yields.
During the pandemic, REITs focused on health care have become safer. Industrial REITs are also safe, with a PD of 0.55%. Investors seeking income should look at those sectors.
Another industry to consider, according to Standard and Poor’s, is insurance.
Life and health insurers have a PD of 1%. Property and casualty insurers have a PD of 1.1%.
Consider Credit Ratings … Before It’s Too Late
Credit ratings aren’t commonly used by investors in the stock market. But they should be.
Bond rating downgrades often spark declines in safe stocks. Upgrades lead to higher stock prices.
Now is the ideal time to consider new ideas. And credit ratings could help investors avoid large losses in the next crash.
Michael Carr, CMT, CFTe
Editor, Peak Velocity Trader