10 stocks that will benefit from higher earnings on company cash, and 10 that have a debt problem

By Barbara Kollmeyer

Critical information for the U.S. trading day

It’s looking like a modestly higher open for stocks following more debt-ceiling progress, and as focus turns to big jobs data and how that might affect Fed policy.

Chatter is also building on the hefty debt raising the Treasury will have to do quickly once a deal goes through. MarketWatch’s Bill Watts deftly explains how that might threaten stocks.

Onto our call of the day, from Jefferies’ global head of microstrategy, Desh Peramunetilleke, who says companies with cold hard cash are an overlooked sweet spot. “Rates and yields are rising sharply in the U.S. and Europe, with both interest income and interest expense set to rise, making cash the king,” he told clients in a note dated Wednesday.

“After witnessing zero cash rates for most of the past decade, cash on balance sheet is starting to earn a healthy return. Indeed, cash-to-total asset has been the best long-short factor this year for global equities, led by U.S.,” he said.

Companies with cash-rich balance sheets also saw far better first-quarter results, while highly geared companies — those with higher leverage that could be at risk from financial troubles if profits fall or rates rise — have seen the biggest underperformance and likely will be hit by rising debt costs, said Peramunetilleke.

Looking across regions, the analyst found that the U.S. and Europe are the most-geared, with the least amount of cash on balance sheets. “Yet given the significant difference in short-term debt (Europe 24% vs U.S. only 11%), we anticipate a [circa] c.9% reduction in MSCI USA’s net interest cost (due to higher interest income) while expecting an c. 8% increase for DM [developed market] Europe,” he said.

On a sector level, consumer services, retail, media, utilities, autos, software and semiconductor companies are expected to see the most profit from higher interest income, while utilities, autos, household and personal care will like see the most impact from rising costs of debt.

Peramunetilleke offered up a list of “cash-rich” U.S. companies set to benefit from higher cash rates. In the top ten: Activision Blizzard (ATVI), ServiceNow (NOW), General Electric (GE), Amazon (AMZN), Fortinet (FTNT), Airbnb (ABNB), VMWare (VMW), Keysight Tech (KEYS), Bruker (BRKR) and Costco (COST).

He also has a list of companies to avoid. That is, those with low cash and high near-term debt maturity that will likely see higher interest expense owing to rising debt costs. The top 10 are: Hewlett Packard Enterprise (HPE), Stanley Black & Decker (SWK), Evergy (EVRG), McCormick (MKC), NiSource (NI), Sempra (SRE) , Celanese (CE), Ameren (AEE), Eversource Energy (ES) and DTE Energy (DTE).

Opinion: Nvidia created an AI bubble, and software stocks are already paying the price

The markets

Stock futures are struggling for traction, with the yield on the 10-year Treasury note up 4 basis points to 3.67%. Asian stocks rebounded after fresh data showed China’s factory activity bounced back to expansion, a day after bleak news from a rival gauge that pushed the Hang Seng Index close to a bear market. The dollar is lower.

Read: A big short in Treasurys? Traders are building up bets around a debt ceiling resolution

For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor’s Business Daily. Follow all the stock market action with MarketWatch’s Live Blog.

The buzz

A day ahead of U.S. payroll data, ADP employment for May has come in much stronger than expected, with a gain of 278,000, while weekly jobless claims rose by 2,000 and a revision to first-quarter productivity was revised up to a fall of 2.1%. Still to come are S&P U.S. manufacturing PMI at 9:45 a.m., ISM manufacturing and construction spending at 10 a.m.

The House of Representatives voted heavily in favor of a crucial debt-ceiling bill on Wednesday night, keeping things on track for Monday’s deadline. The bill now heads to the Senate before it can get signed into law by President Biden.

Skipping a June rate hike will end the “frenetic” pace of increases seen over the past 14 months, Philadelphia Fed President Patrick Harker told MarketWatch in an interview on Wednesday. He is also due to speak at 1 p.m. on Thursday.

Macy’s shares (M) are down 8% as weak sales forced a guidance cut from the department store chain. Better results from rival Nordstrom (JWN) are driving that stock up 3%, while Victoria’s Secret (VSCO) is down 13% on a cut in the lingerie group’s outlook. Chewy shares (CHWY) are up 16% after the pet retailer’s solid earnings and expansion plans.

On the tech side, AI group C3.ai shares (AI) are off 17% on a disappointing revenue forecast, while disappointing outlooks are hitting shares of cybersecurity group CrowdStrike(CRWD) and software management group Okta(OKTA), down 9% and 19%, respectively. But forecast-beating results from cloud-software group Veeva Systems(VEEV) and storage software group Pure Storage(PSTG) are lifting those respective shares by 8% and 5%.

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The chart

From Deutsche Bank strategists Jim Reid and Henry Allen, comes this chart that shows just how May shook out for global assets:

“With all said and done, financial assets put in a weak performance over the month as a whole. That included commodities, which fell to their lowest level in almost two years, and in aggregate there were losses for global bonds and equities too. On the other hand, we did see a few areas of significant outperformance, including a major advance for tech stocks as investors contemplated the implications of AI,” said the strategists in a note.

The tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:

Ticker  Security name 
TSLA    Tesla 
NVDA    Nvidia 
AI      C3aI 
GME     GameStop 
BUD     Anheuser-Busch InBev 
PLTR    Palantir 
AAPL    Apple 
NIO     Nio 
AMC     AMC Entertainment 
TRKA    Troika Media 

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-Barbara Kollmeyer

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06-01-23 0928ET

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