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Zombie Companies - The Contagion is Spreading

Posted by Michael Venuto on May 27, 2020 9:30:00 AM
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A few weeks ago, our team wrote a piece regarding the number of zombie companies in the market cap-weighted industries. Our concern for the companies that require more unprecedented government assistance to survive COVID-19 is growing. We believe industries like airlines, restaurants and shopping malls will survive in some way, but the well-being of the public shareholders and current capital structure remains in question. Although we have seen some of these zombie companies rally off the extreme lows. Most of this bottom fishing is likely misguided as the disconnect between Main Street and Wall Street is resolved.   

 

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The Hoard is Gathering
Last week, we saw other thought leaders and news providers embrace the zombie concept and further investigate the concerns. Liz Ann Sonders shared on Twitter that nearly 2.2 million Americans work at zombie companies.

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CNBC also covered the concerns with zombie companies and questioned their ability to raise capital through debt in this environment.

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Is the Cure Obvious?
We followed up our original research on zombie companies with a more optimistic view for investors. In our research note, “A Bull Market in Bookshelves,” we looked at investments that not only avoid zombies, but also embrace mega-trends that have been accelerated by the response to COVID-19. Below we looked at the top performing non-leveraged US ETFs, excluding the country-specific funds.  The performance certainly appears to coincide with the themes and low infection from zombie companies.

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Clearly, the market is awarding the innovators; even IBUY, which has 13% exposure to zombies (primarily online travel agencies), is performing very well because of the trend toward online commerce. The opposite is also true. The worst performers, noted below, are either extremely infected, or focused on oil.

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TETF.Index Performance 

tetf

Returns as of May 22, 2020.
Inception Date: April 4, 2017.

Index performance is for informational purposes only and does not represent any ETF. Indexes are unmanaged and one cannot invest directly in an index. Past performance is NOT indicative of future results, which can vary.  

 

TETF.Index Performance vs. Leading Financial Indexes

Click here for information on the Index following the ETF industry

 

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