The recession of 2008 taught investors to focus on lean companies that had enough cash around keep the lights on. But as the economy continues to improve, does it make sense to part from the pared-down approach to investing?

It can. Companies that struggled under the burden of heavy debt loads have been ignored for a while now, offering a potentially great value opportunity for investors who are willing to add a bit of risk to their portfolios. To be sure, not all of these underwater companies are worth taking a stake in – but the ones that aren't are still worth watching. After all, a simple debt restructuring could potentially be all that stands in the way of a more reasonable fundamental picture.

Underwater AND Profitable
Here's a look at a handful of companies that are saddled with huge debt loads but still manage to operate profitably.

Healthcare Rising
Things are looking up for hospital operator Tenet Healthcare (NYSE:THC). Following a restructuring in 2009 that saw the company divest itself of a number of underperforming facilities, THC is starting to reemerge as a key player in the healthcare arena. Debt isn't the only problem that was on the company's plate. In 2002, a Medicare fraud and kickback scheme were uncovered, slashing share prices by 72% in the last five days of October that year.

Now, with investors' attention once again, and a rebounded reputation, the company's leverage remains its biggest hurdle. Tenet paid down a reasonable portion of its debt as part of its restructuring program, a good sign that management is turning the corner. A profitable year in 2008 echoed that bullish sentiment. Hopefully for Tenet, that sentiment can continue. (Learn more in Investing In The Healthcare Sector.)

Risky Real Estate
One of the worst hit sectors in the past few years has been real estate. As the real estate market crumbled, so too did the financial positions of property management companies and real estate investment trusts (REITs). Among this group is Home Properties (NYSE:HME), a REIT that owns and operates apartment communities. Like Tenet, Home Properties has focused on improving its financials in recent years by selling off underperforming assets in favor of properties with more profit potential.

But that change-up has done little to counter the adverse effects of an ailing real estate market – a fact that sent the REIT's shares down double digits in 2008. With an already-leveraged balance sheet, Home Properties' chances to increase its property portfolio through borrowings could be restricted by a lack of available credit. (Learn more in Basic Valuation Of A REIT.)

CBL & Associates Properties (NYSE:CBL) faces similar challenges. The Tennessee-based REIT owns and operates commercial real estate, including shopping malls, community centers, and office buildings. Because of CBL's connection to consumer spending through its mall business, the REIT has been doubly hurt by cutbacks in consumer spending and real estate devaluations in recent years. And with interest rates expected to rise in coming years, the company's debt service could reach unmanageable proportions; currently, interest alone accounts for nearly 30% of revenues.

Should Republic Be Grounded?
Regional airline Republic Airways (Nasdaq:RJET) has been in the headlines lately as one of the best-in-breed air carriers following November earnings that impressed Wall Street. Much of the airline's performance has been thanks to significantly lower fuel costs in 2009 and better efficiency than the competition. But a highly leveraged balance sheet could be bad news for investors who are already on relatively thin ice.

The future for airline stocks is still very uncertain at the onset of 2010; fuel costs and the cost of capital both remain relatively volatile and have substantially impacted bottom lines in the last several years. Republic's relatively recent acquisition of former partner Frontier Airlines increases the former's debt load even more. With Republic required under current agreements to retire around $750 million in borrowings during the next few years, the company will need to tighten its belt hard to stay on investors' radar.

Don't Discount Liquidity
While many investors and economists believe that better economic days are ahead of us, it's important to plan for how a second pullback could affect your portfolio. Although many underwater stocks trade at a perceived discount right now, there's a reason why investors favored companies with cash-filled coffers in 2009. Don't get caught with an over-leveraged portfolio.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: First Trust Dow Jones Global Sel Div

    Find out about the First Trust Dow Jones Global Select Dividend Index Fund, and learn detailed information about characteristics and suitability of the fund.
  2. Investing News

    Canada in Recession

    On September 1, 2015, Statistics Canada reported that the economy has contracted by 0.5% in Q2 2015, after falling 0.8% in previous quarter.
  3. Economics

    Is a Recession Coming?

    In the space of a week, the VIX Index, a measure of market volatility, spiked from 13, suggesting extreme complacency, to over 50, evidencing total panic.
  4. Investing

    What’s Holding Back the U.S. Consumer

    Even as job growth has surged and gasoline prices have plunged, U.S. consumers are proving slow to respond and repair their overextended balance sheets.
  5. Economics

    A Look at Greece’s Messy Fiscal Policy

    Investigate the muddy fiscal policy, tax problems, and inability to institute austerity that created the Greek crises in 2010 and 2015.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares US Real Estate

    Learn about the iShares US Real Estate fund, which holds shares of equity and nonequity real estate investment trusts incorporated in the United States.
  7. Economics

    How Do Asset Bubbles Cause Recessions?

    Understand how asset bubbles often lead to deep, protracted recessions. Read about historical examples of recessions preceded by asset bubbles.
  8. Investing News

    What Shook the U.S. Stock Market Today?

    What was looking as a decent year for US Stock market has suddenly gone off track as the Dow Jones Industrial Average plunged 531 points in the week ending August 23, 2015.
  9. Chart Advisor

    Real Estate Investment Trust ETFs Offer Stability

    Risk-averse traders are turning to real estate investment trusts. We'll look at a popular real estate investment trust ETF and few of its top holdings.
  10. Professionals

    Why Investors Should Consider Cash Right Now

    With so many market watchers thinking that the current stock rally is getting long in the tooth, investors might considering upping their cash holdings.
  1. Real Estate Investment Trust - ...

    A REIT is a type of security that invests in real estate through ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Dividend Yield

    A financial ratio that shows how much a company pays out in dividends ...
  4. The New Deal

    A series of domestic programs designed to help the United States ...
  5. Dividend

    A distribution of a portion of a company's earnings, decided ...
  6. Power center

    A large (250,000 to 750,000 square ft.) outdoor shopping mall ...
  1. What is the difference between adjusted and regular funds from operations?

    While regular funds from operations measures the cash flow generated by the operations of a real estate investment trust ... Read Full Answer >>
  2. How does the risk of investing in the industrial sector compare to the broader market?

    There is increased risk when investing in the industrial sector compared to the broader market due to high debt loads and ... Read Full Answer >>
  3. How can I use the funds from operations to total debt ratio to assess risk?

    The funds from operations (FFO) to total debt ratio is used in fundamental analysis to determine a company's financial risk. ... Read Full Answer >>
  4. What kind of companies in the utilities sector offer the most stable dividends for ...

    Among the companies that offer the most stable dividends for risk-averse investors are large, solidly established U.S.-based ... Read Full Answer >>
  5. How can I hedge my portfolio to protect from a decline in the retail sector?

    The retail sector provides growth investors with a great opportunity for better-than-average gains during periods of market ... Read Full Answer >>
  6. What is the correlation between term structure of interest rates and recessions?

    There is no question that interest rates have enormous macroeconomic importance. Many economists and analysts believe the ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!