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Credit 101 for Investors: Debt and Stock Price in the Housing Recovery


NEW YORK (TheStreet) -- Entirely too often, equity-focused traders, investors, analysts and pundits pay little attention to how companies fund their operations. In a world of cheap debt, this can mean that stocks are far overvalued or undervalued, depending on their capital structures.

This creates distortions in equity pricing and valuation, but more importantly, this lack of respect for credit fundamentals by some creates opportunity. Companies without debt, all else being equal, should be undervalued relative to their theoretical value with a more optimal capital structure (e.g., a lower cost of capital). The stock of companies with a lot of debt can be overvalued, especially in...