10 Stocks to Avoid Because of Their Sky-High Debt

If you’re looking for stocks to avoid in 2022, I’ve got a hint.

The Financial Times recently reported that global bond issues totaled $101 billion through Jan. 7, the second-highest amount to start a new year since 2002.

The highest amount? $118 billion at the start of 2021.

Here’s what FT had to say about the fast start in 2022:

“‘It was obviously very active out of the gates,’ said Dan Mead, head of investment-grade syndicate at Bank of America. ‘There is an expectation among our issuers that rates are likely going to continue to trend higher from here. They will try to take advantage of the market now while there are favourable conditions to lock in those rates.’”

The problem with the rush by corporations to obtain debt at lower interest rates is that they already had near-record amounts on their balance sheets. In 2020, the level of corporate debt had grown to more than $10.5 trillion, 30x levels in 1970.

I’ve never been a fan of debt-laden companies. But as interest rates rise in 2022 — there are four rate hikes expected in the year ahead — investors will look to reallocate assets to firms with sounder balance sheets.

Here are 10 stocks to sell because of their sky-high debt:

• Hertz Global Holdings (NASDAQ:HTZ)
• Penn National Gaming (NASDAQ:PENN)
• NCR (NYSE:NCR)
• Discovery Communications (NASDAQ:DISCA,NASDAQ:DISCB,NASDAQ:DISCK)
• AMC Entertainment (NYSE:AMC)
• Norwegian Cruise Line Holdings (NYSE:NCLH)
• American Airlines Group (NASDAQ:AAL)
• Restaurant Brands International (NYSE:QSR)
• CarMax (NYSE:KMX)
• Anheuser Busch InBev (NYSE:BUD)

If you own any of these 10 S&P 500 names, you might want to think twice before continuing to hold them.

High Debt Stocks to Sell: Hertz Global Holdings (HTZ)

There’s no question that Hertz has an interesting story. Left for dead in 2020, it went into bankruptcy in May that year and emerged 14 months later on July 1, 2021.

Not only would Covid-19 create a chip shortage that reduced the number of new cars produced, it also sent used car prices through the roof. As part of Hertz’s bankruptcy plan, it sold 180,000 vehicles from its rental fleet at a time when it could drive a hard bargain.

In addition, as the world reopens from Covid — though who knows when that will happen — the company will be able to rent its vehicles at prices higher than usual. That should be able to drive revenues and profits.

Some suggest the rental car business has never been more profitable. I would beg to differ.

Despite emerging from bankruptcy, it still has $10.1 billion in debt, approximately 87% of its market capitalization. The company’s current Altman Z-Score is 0.6, according to Macroaxis.com. Anything under 1.81 suggests a company that could go bankrupt within 24 months.

In the trailing 12 months (TTM) ended Sept. 30, 2021, Hertz used $4.4 billion in free cash flow, down from previous years but higher than I’m comfortable with.

Penn National Gaming (PENN)

The bloom has come off the rose at Penn National Gaming. At one point in early 2021, it could do no wrong, trading as high as $142. But unfortunately, it’s been all downhill since. As a result of its stock’s downturn, its long-term debt now accounts for 149% of its market cap. A year ago, it would have been less than 50%.

CNBC’s Jim Cramer recently suggested investors stay away from online gambling stocks such as Penn because these companies are throwing good money after bad to win market share.

Cramer believes that investors should wait until the competitive landscape is more certain. Translation: you ought to stay on the sidelines until some players get taken out.

With such a high amount of debt, Penn’s unlikely to be a buyer or a seller in the months ahead. Moreover, given that sports and online betting in the U.S. remain relatively unprofitable due to the money spent acquiring customers, he doesn’t see 2022 as a good year until the deals start.

When that will be, I don’t know. What I do know is that Penn’s Barstool Sports investment isn’t looking like the slam dunk investors thought it was.

NCR (NCR)

I have to admit I know very little about what NCR’s been up to the past few years. However, Barron’s wrote a cheerful piece last July suggesting the company should benefit from reopening.

Six months later, the article seems poorly timed. Apparently, it’s trying to move from point-of-sale registers and automated teller machines (ATMs) to subscription-based software and services.

Who isn’t getting into the subscription business model? Even Taco Bell is offering a Taco Lover’s Pass that gets you a taco a day for 30 days for just $10 a month. So it’s completely understandable that its management is trying to move it to higher-margin products and services.

Over the past five years, NCR stock had an annual total return of 0.3%. That’s compared to 17.5% for the entire U.S. market. So long-time shareholders need some good news.

However, with $6.0 billion in long-term debt — that’s 107% of its market cap — and limited growth, it’s going to be difficult for NCR to dig itself out of the hole it’s in.

Discovery Communications (DISCA,DISCB,DISCK)

I was totally against AT&T (NYSE:T) buying Time Warner in the first place. So the fact that it’s going to spin off WarnerMedia and merge it with Discovery is at least a step in the right direction for the wireless carrier.

There’s no question that WarnerMedia is a much better fit with Discovery than with AT&T. So it’s more than possible the deal will work out for everyone involved, including both company’s shareholders.

However, the deal made by CEO David Zaslav seems more like a legacy moves, and those rarely work out very well. And while it’s true that media companies require to scale these days, it could turn out to be one move too many.

Discovery currently has $14.8 billion in long-term debt. That’s 103% of its current market cap. With the addition of $43 billion in WarnerMedia debt, the new Warner Bros. will have almost $60 billion in debt.

Sure, the market cap will rocket higher, but that won’t come without a big hit to the balance sheet, regardless of the assurances that free cash flow generation will quickly help the debt overhang.

We know how that went at AT&T.

AMC Entertainment (AMC)

If just one person loves the whole meme stock movement, it’s certain to be AMC CEO Adam Aron. He’s gotten stinking rich over the past 12 months, thanks to retail investors across the country.

Nothing’s changed about the company since before the pandemic began in February 2020; it still makes all its money from a declining movie-going audience. And as the company’s 2020 10-K points out, between 2011 and 2019, movie audiences didn’t grow. In 2011, 1.28 billion people went to the movies in the U.S. In 2019, 1.24 billion people went — a decade with no growth.

It’s hard to imagine that changing anytime soon.

Thanks to a ridiculously overpriced stock, AMC’s long-term debt of $10.9 billion accounts for just 93% of its market cap, its lowest percentage since I don’t know when.

The CEO says he’s done selling shares after netting $42 million in planned stock sales since last November. He has 2.3 million in equity grants left to vest. So you can be sure, despite his assurances, that he will be selling them once they vest.

He will not be left holding the AMC bag. Thanks to retail investors, his retirement is more than paid for.

Norwegian Cruise Line Holdings (NCLH)

One of the most capital-intensive businesses in the world is cruise lines. You can’t just put out a shingle that says you’re in the cruise business and money starts rolling in. You have to build massive ships that carry 6,000 people. The cost to build can quickly run into the billions.

However, the cost to build these floating hotels also acts as quite the barrier to entry. Not many people have access to billions for one ship, let alone a whole fleet.

Norwegian Cruise Line’s long-term debt is $12.4 billion or 133% of its market cap. So it had to beg, borrow and steal during the pandemic to remain in business. The same goes for its two bigger competitors, Royal Caribbean (NYSE:RCL) and Carnival (NYSE:CCL).

While I’m not too fond of the amount of debt it’s had to borrow to keep solvent, cruises will remain popular with American travelers in the years ahead. Therefore, I don’t think you need to be too worried about its -0.27 Altman Z-Score.

Besides, there are too many people owed money by the cruise lines. Closing up shop would mean billions of dollars down the drain for its lenders. But that doesn’t mean it’ll bring in enough revenue to reward shareholders.

American Airlines Group (AAL)

While planes aren’t quite as expensive as cruise ships, companies like American Airlines have to buy hundreds of aircraft to keep up with their schedules. So the costs, even when they’re leasing, do add up.

Richard Branson, the founder of Virgin Atlantic, is often quoted as saying, “If you want to be a millionaire, start with a billion dollars and launch a new airline.”

As with the cruise industry, airlines have taken it on the chin during the pandemic. Now, they face major flight cancellations due to labor shortages from staff getting the omicron variant.

The Dallas Morning News recently reported that despite seven mass cancellation events since June 2021, airlines are getting flights that take off to their destinations on time, which wasn’t the case pre-pandemic.

According to the paper, American Airlines’ on-time arrival rate since June is the third-highest of any major carrier. I don’t think there’s any doubt that leisure passengers will continue to travel by plane in the years to come because there’s no faster mode of transportation to get from point A to point B.

The big problem for airlines is the loss of business travel. A lucrative part of any major carrier’s business strategy, most airlines believe that the good old days will never return as companies spend much less on travel expenses.

How that shakes out, we’ll find out soon enough.

As for American’s $46.7 billion in long-term debt, which represents 389% of its current market cap, it’s going to take several years to bring it down to pre-pandemic levels.

Let’s not forget, it’s only been eight years since the company emerged from bankruptcy. A few wrong moves and it could end up in bankruptcy court once again.

Restaurant Brands International (QSR)

I’ve never been a fan of this restaurant conglomerate for various reasons. First, its Brazilian investors started on the wrong foot when they acquired Tim Hortons in 2014, and despite some good acquisitions since then, I’ve always been suspicious of their business mindset.

And the reality is that QSR stock hasn’t done much since it acquired Tim Hortons. Over the past five years, it has had an annualized total return of 6.4%, 360 basis points less than the entire Canadian market and even worse relative to the U.S. market.

Perhaps a big reason for its failure to launch is its long-term debt, which is $14.1 billion or 77% of its market cap. That doesn’t sound like a lot until you realize that McDonald’s (NYSE:MCD) has a debt-to-market cap percentage of 25%.

I just plain don’t like this stock.

CarMax (KMX)

After discussing that used car prices have gone through the roof during the pandemic, you’re probably surprised to see I’ve included the country’s largest used car retailer on my list.

Despite booming revenues and earnings, CarMax still has long-term debt of $18.6 billion with very little cash on the balance sheet. Its current long-term debt accounts for 96% of its market cap But, like Penn National Gaming, when the good times end (and they always do), that percentage will go way up.

The 16 analysts covering KMX stock give it an Overweight rating and a median target price of $158.50, suggesting that I’m way off base on this one.

Looking at its debt in the most recent 10-Q, I can see that a third of its total debt — $700 million in term loan that doesn’t come due until 2026 — suggests that it should be fine.

However, it also has $15.2 billion in auto loans receivables on its balance sheet at the end of November. When interest rates move higher, you can expect loan losses to increase as some of its customers fail to keep up with payments.

Anheuser Busch InBev (BUD)

The maker of Budweiser is another Brazilian investment from 3G Capital, the same group behind QSR. Together with members of some of Europe’s oldest beer families, the two groups control 42.8% of the voting shares of the world’s largest beer maker.

The Brazilian investment in BUD hasn’t worked out particularly well. After buying the St. Louis brewery in 2008 for $52 billion, it went on to buy SABMiller for $107 billion. Since it closed the acquisition in October 2016, BUD shares have lost approximately half their value.

Care to guess how much long-term debt the company has? $90.6 billion or 81% of its market cap. The good news is that its debt was down from $110 billion in 2018.

Despite losing half its value over the past five years, Anheuser Busch InBev’s dividend yield is just 1.8%. Admittedly, that’s better than the S&P 500’s average yield of 1.3%, but given the lack of growth for Big Beer, you ought to be getting more.

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.