Take 15 - Random Investing Notes
A collection of insightful investment pieces to broaden and elevate the investing mindset. Includes: Credit Ratings, Pricing Power, and the Renewables Dilemma.
Credit Ratings
A credit rating is an assessment of a country's or company's ability to repay debt. It influences borrowing costs, investor confidence, and overall economic stability.
Credit ratings are not just for countries—they also apply to corporate bonds and stocks. Companies issue debt (bonds) to fund operations, and their credit rating determines interest rates on that debt. Higher-rated companies (e.g., AAA-rated firms like Microsoft or Johnson & Johnson) pay lower interest because investors see them as financially strong. Lower-rated companies (junk bond status, BB or lower) pay higher interest rates, making it costlier to borrow money. When assessing the quality of debt on a company’s balance sheet, this tool effectively analyzes the creditworthiness of its debt obligations.
The three major credit rating agencies are:
1. Moody’s Investors Service
Founded: 1909
Rating Scale: Aaa (highest) to C (lowest)
Notable for: Emphasizing long-term risk and sovereign credit ratings. It was the last of the “Big Three” to downgrade the U.S. credit rating.
2. Standard & Poor’s (S&P) Global Ratings
Founded: 1860
Rating Scale: AAA (highest) to D (default)
Notable for: Downgrading U.S. debt in 2011 amid concerns over political gridlock. S&P’s ratings are widely used to assess corporate bonds.
3. Fitch Ratings
Founded: 1914
Rating Scale: AAA (highest) to D (default)
Notable for: Often considered the “tiebreaker” between Moody’s and S&P. Fitch was the second agency to downgrade U.S. debt in 2023 due to fiscal instability.
Moody’s Downgrade of U.S. Credit Rating
Moody’s lowered the U.S. credit rating from Aaa to Aa1, citing rising deficits and growing national debt.
This marks the first time all three major agencies (Moody’s, Fitch, and S&P) have rated U.S. debt below the top-tier level.
The downgrade reflects concerns over ballooning government debt, which has surged from $4.5 trillion in 2007 to nearly $30 trillion today.
Moody’s noted that federal deficits are expected to widen from 6.4% of GDP in 2024 to 9% by 2035, driven by higher interest payments, entitlement spending, and low tax revenue.
The agency also warned that extending the 2017 tax cuts could add $4 trillion to the federal deficit over the next decade.
Impact of the Downgrade
Higher borrowing costs: Investors may demand higher yields on U.S. Treasury bonds, making it more expensive for the government to borrow money.
Consumer impact: Treasury bond rates influence mortgage rates, corporate borrowing costs, and credit card interest rates, meaning consumers could face higher borrowing costs.
Why It Matters
The downgrade signals long-term fiscal concerns and raises questions about government spending and debt management.
While the U.S. still holds a strong credit rating, continued fiscal expansion without credible debt stabilization efforts could further impact borrowing costs and economic flexibility.
The Power of Pricing
Companies with pricing power can raise prices without increasing costs, leading to higher profits and better returns for shareholders. Here are some important features of such companies:
Brand Strength & Loyalty: Businesses that consistently raise prices while maintaining demand often have strong brand recognition and customer loyalty. Luxury brands like Hermès and Ferrari thrive on exclusivity.
Inflation Protection: When costs rise due to inflation, companies with pricing power can pass those costs onto customers instead of absorbing them.
Competitive Advantage: Firms that control their prices often have a unique market position, making them less vulnerable to competitors offering lower-cost alternatives.
Resilience in Economic Downturns: During tough times, businesses with pricing power can maintain their profitability, unlike those that rely on discounting.
And, finally:
Higher Gross1 and Profit2 Margins: Companies with strong pricing power can increase prices without significantly raising costs, leading to higher profitability.
Let’s back this up with some applicable companies and metrics.
American Express: Maintains its pricing power through its closed-loop network, which allows it to control transaction fees and merchant costs, and by offering premium rewards and exclusive benefits that justify higher annual fees.
AXP Visa: Maintains its pricing power through its global network dominance, strong brand trust, control over transaction fees, regulatory adaptability, and continuous technological innovation.
VISA Fair Isaac Corporation: Maintains its pricing power through its proprietary credit scoring system, allowing businesses to set optimal rates for loans, deposits, and marketing offers while balancing profitability and customer satisfaction.
FICO Coca-Cola: Maintains its pricing power through strong brand recognition, allowing it to raise prices without losing demand, and strategic product diversification, ensuring consumers remain loyal across various beverage categories.
KO Ferrari: Maintains its pricing power through brand exclusivity, limiting production to create scarcity, and premium pricing.
RACE Netflix: Maintains its pricing power through exclusive and diverse content, which drive subscriber retention, and market leadership, with over 300 million global subscribers reinforcing its ability to raise prices without significant churn.
NFLX
Renewables Dilemma
With the major power outage that affected Spain and Portugal on April 28, 2025, it is a good time to assess the limitations of renewable energy.
System inertia refers to the ability of an electricity grid to resist sudden changes in frequency. It comes from the kinetic energy stored in large rotating generators, such as those in traditional fossil fuel, nuclear, and hydroelectric power plants.
Grid stability is crucial to maintaining a stable frequency preventing blackouts - this is called inertia. When a power plant fails or demand spikes, inertia provides a temporary buffer, allowing time for other systems to react. Wind and solar power - renewable proponents - which rely on inverters rather than rotating generators, do not naturally provide inertia. This can make grids more vulnerable to instability. This is exactly the cause of the outage that Spain, Portugal, and even parts of France experienced.
Take a look at the chart above. At the time the electricity was lost (indicated by the black circle), the sources of generation were solar and wind, which provide minimal to no inertia to the electrical grid. There was no backstop, and thus, a massive outage occurred.
So, what generates the most system? Nuclear energy and natural gas. This highlights achieving a net-zero state or world powered entirely by renewable energy is unattainable without repercussions for both people and the environment.
When investing in energy stocks, it is crucial to consider the balance between renewable and non-renewable energy sources, as imbalance can lead to instability. This aligns with the principle of diversification.
Past Editions
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Consider joining DiviStock Chronicles’ Referral Program for more neat rewards!Please refer to the details of the referral program.Gross margin is the percentage of revenue remaining after deducting the cost of goods sold (COGS), showing how efficiently a company produces its products.
Profit margin is the percentage of revenue that remains as profit after deducting all expenses, including operating costs, taxes, and interest, reflecting overall profitability.