Inside today’s Daily Journal…

Editor’s note: With so many disruptions taking place in the market these days, Porter has turned the Journal over to Marty Fridson, lead analyst for Porter & Co.’s Distressed Investing. For nine consecutive years, Marty was ranked No. 1 in high-yield strategy. He has written seven books, the most recent of which is The Little Book Of Picking Top Stocks… and Marty is such a legend that there is a recently published book about corporate finance that devotes an entire chapter to him. We excerpted last year in the Daily Journal.

Here’s Marty…

Whenever there is a market disruption, bonds tend to notice sooner than equities.

Let’s look at the most recent example: the impending disruption of the software industry by artificial intelligence (“AI”). Specifically, let’s look at the financial-market repercussions that include the mounting demands for redemption by private credit fund investors.

Bond investors saw this coming two months before equity investors.

In a falling-off-the-cliff effect, the S&P 500 Information Technology Index’s price-to-earnings (P/E) ratio plunged from 34.4x on March 18 to 22.1x on March 19. The full S&P 500’s P/E ratio dipped only slightly that day, from 20.7x to 20.5x. So infotech’s valuation premium over the rest of the large-cap universe nearly disappeared, plummeting 12 points in a single day.

While the March 19 adjustment in the equity market inflicted a lot of portfolio damage, it didn’t arrive without some warning. The P/E differential between infotech and the broader market had been compressing for some time.

But investors would have been even further ahead of developments if they’d watched what the bond market was saying.

The bond analogy to the stock market P/E differentials involves this metric: yield spread-versus-Treasuries. That’s the amount of extra interest you receive for owning a corporate bond – which might fail to make all of its scheduled principal and interest payments – rather than U.S. government debt, where that’s not considered a risk.

The spread in yields between corporate bonds and Treasuries is expressed in basis points (“bps”), where one basis point equals 1/100 of a percentage point. If the spread differential between ICE BofA’s U.S. High Yield Technology Index and the overall U.S. High Yield Index increases, it means the technology sector – which includes a lot of software company debt – is losing value and getting cheaper versus the full speculative-grade universe.

On October 15, 2025, the tech sector began losing value, as the technology-versus-high-yield spread differential increased from 27 bps to 36 bps. Bond investors never looked back from that point. The differential kept widening, reaching a peak of 186 bps on February 24, 2026.

Meanwhile, in the stock market, on October 15, the infotech/S&P 500 P/E differential increased from 11.2 to 13.4 – meaning the tech sector’s premium valuation over the broader market was getting larger. It wasn’t for another two months, until December 12, that the differential fell back below 11.2 to stay, dropping to 10.6. That’s a fair warning for March 19’s drastic decline, but a long time after the bond market’s initial signal.

This instance of bond valuations starting to spot trouble sooner than equity prices is not an isolated example. Bondholders have a different mindset from stock buyers, whose perceptions are colored by tales of ten-fold price increases on fabled high-flyers. (Note that what follows refers to ordinary, non-convertible bonds.)

Unless a company’s bond is trading at an extremely deep discount that indicates a high probability of near-term bankruptcy, investors’ upside is limited. It’s capped. At maturity the bond will be worth $1,000 (par) and no more. Between now and maturity, the most that holders can ordinarily hope for is to get taken out at a small premium if the company decides to redeem it prior to maturity – but there’s no way a bond bought at or near par will double or triple. As a result, bond investors tend to be more focused than stock buyers on the downside, asking, “What could go wrong?”

While having a glass-half-empty perspective might sound like a dreary existence, it frequently pays off in spotting trouble early on. And – here’s what’s key – it can also work in reverse, with bond prices indicating that the worst has passed for a company, long before equity investors catch on. Once high-yield bond investors become convinced that bankruptcy isn’t likely, they’re delighted to buy a deeply depressed bond with a double-digit yield.

And who wouldn’t be? As more bond buyers conclude that default is off the table, they’ll jump in and drive up the price. But the company isn’t by any means thriving at this point, so equity buyers aren’t biting yet. One key reason equity investors are hesitant to jump in earlier is that many institutional money managers don’t want to show on their quarter-end statements a stock that’s down drastically from its previous high.

Eventually, the company’s earnings prospects start to turn around and equity capital will start to flow back into the stock. Investors who make a tidy profit on the bond will now have a chance to get a second bite of the apple. This is the concept behind our Distressed Investing “topping off” strategy. The meticulous upfront research we put into the company before recommending its bond generates an additional payoff when we continue to follow the company as a stock recommendation.

We’ve successfully employed this strategy five times over the past few years – with our bond recommendation rising followed months later by a recommendation to buy shares in the same company – which then provide the real upside. Here are just three recent examples…

A footnote on the point about equity investors being focused on upside, searching for stocks with the potential to rise tenfold or more: Years ago, this idea was commonly described as “looking for the next Xerox.” That photocopier company’s shares multiplied in price by 860x from its incorporation in 1906 to 1965, when it was in its heyday.

How dated that comment would be now. Today, Xerox (XRX), a solid AA-rated credit in its glory years, is a component of the speculative-grade BondBloxx Technology Index ETF (XHYT) and trading at distressed levels. That’s defined, according to a market convention I originated, as a spread-versus-Treasuries of 1,000 bps or more. Xerox’s bonds currently carry spreads of over 4,000 bps.

The takeaway is this: Although AI has only recently begun to disrupt the market, disruption is nothing new. Dominating the market for copy machines ceased to be a guarantee of high profits as digitalization took over the dissemination of documents. Falls from grace like we’ve recently witnessed in software will continue to be an investment hazard with which investors must reckon.

But you don’t have to navigate those hazards alone. Marty and his team can do that for you – month after month, combing through many offerings on the distressed debt and equity piles to find the winners highlighted above. The next Distressed Investing recommendation reaches subscriber inboxes on April 11 at 10 AM. To have it reach your inbox, click here to learn how.

Tell us what you think of today’s Journal: [email protected]

Good investing,

Martin Fridson
New York, New York

1. Global manufacturing shrugs off the war. S&P Global’s (SPGI) latest Purchasing Managers’ Index (“PMI”) surveys show manufacturing activity expanded across every major global economy tracked in March. The consensus view was that the Iran war would choke off global industrial activity. So far, at least, that does not appear to be the case.

2. Ceasefire boosts market sentiment, but challenges remain. Stocks soared on the news of a two-week ceasefire in Iran, while crude-oil prices dropped as much as 20%. However, little has changed in reality. Iranian missile strikes continued against Israel overnight, and Israel bombed Iranian proxies in Lebanon. Meanwhile, a drone attack hit the Saudi Arabian east-west pipeline responsible for diverting 7 million barrels per day of oil outside of the Strait of Hormuz. There’s a long way to go between announcing a ceasefire and reaching a formal peace deal that all parties agree on and stick to… Volatility will continue.

3. New White House paper demolishes the case for banning stablecoin yield. The White House Council of Economic Advisers (“CEA”) published a paper today arguing that prohibiting stablecoin yield – a key provision holding up passage of the crypto-regulatory Clarity Act in Congress – would deliver almost none of its promised benefits. The CEA’s model finds that a yield ban would boost bank lending by $2.1 billion – an increase of just 0.02% – while imposing an $800 million net welfare cost on consumers. In short, the analysis found that “a yield prohibition would do very little to protect bank lending, while forgoing the consumer benefits of competitive returns on stablecoin holdings.”

Shares of gold royalty company Franco-Nevada (FNV) rose on yesterday’s news that the Panamanian government has approved processing stockpiled ore at the Cobre Panama mine, which it had closed following environmental protests in 2023. While it’s not a full reopening, Franco-Nevada expects to see a solid delivery of gold and silver. We recommended Franco-Nevada as a Best Buys on December 15, 2023, and it is up 145% since then.

Every month, we publish a list of Best Buys – the three recommendations among all Porter & Co. publications that we feel are at the most attractive price. Since we began the service, Best Buys have produced a total return of 45.9% versus the S&P 500’s 28.9%. To receive Best Buys every month, click here.

Jeff C. writes:

Porter Comment: I’ve got some incredible new ideas in the pipeline. AI is allowing me to do more theoretical research in a week than I was able to do before in a year. You’ve seen tangible results of that with our Better Than Berkshire Index. And there’s a lot more coming, like the Financial Sorcerer’s Stone.

John T. writes:

Porter Comment: Your question is so vague, I don’t think I can answer in a way that will be helpful. I think a more useful response (to a question you didn’t ask) is that Wells Fargo is the leading commercial bank lender to private credit and that all of the BDCs (business development companies) are at substantial risk. These problems will become much, much worse if the rising energy costs trigger a recession.

James B. writes:

Porter Comment: Porter & Co. is aware of the growing supply chain problems inherent in a trade war with China, although I don’t believe we keep daily tabs on the global tungsten situation. It’s very hard to know how to invest in these situations. Should we pile into the start-ups that are going to mine these minerals here…? Seems like a sure bet, unless Trump changes his mind or the next president kills the tariffs. I’ll stick to the easy games: Coca-Cola (KO), in its entire operating history, has only seen case volumes decline (annually) twice. Franco-Nevada’s (FNV) revenue grows, on average, 17% a year. There are 10 trillion cigarettes sold globally each year and, contrary to public opinion, more and more are sold every year. There are no “called strikes” in investing. And the judges don’t care about the “triple axel” – there’s no extra credit for difficulty. So I prefer to take the easy way home.

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