Clean as a Whistle: Four Low-Debt Stocks
Posted: May 09, 2017
A person might smoke cigarettes and drive while texting, and yet come to no harm. But that’s not the way to play the odds.
For companies, piling on debt is a form of high-risk behavior. Much like our texting and smoking driver, many high-debt stocks have escaped unharmed in the past few years, as interest rates lingered at record lows. If rates rise in the next couple of years, more of them will run into problems.
I prefer low-debt companies. Not only do they have a smaller risk of bankruptcy, they also enjoy strategic flexibility. They can afford to make acquisitions, or invest in promising projects. Rarely do they have to sell off a thriving subsidiary to raise cash.
I’ve featured low-debt companies in two series of articles. In 14 articles, mostly published in May of each year, I’ve highlighted companies that shine based on low debt. Today’s column is part of that series.
In another 12 articles, mostly published in June, I’ve singled out companies with unusually high profits, coupled with low debt.
In today’s column, I call your attention to four companies that are debt-free or close. I think they deserve serious consideration as buy candidates.
People as old as I am will recall being blinded by the headlights of a car driving behind them at night. That happens less often these days because of the self-dimming mirrors made by companies like Gentex Corp. (GNTX).
Based in Zeeland, Michigan, Gentex also makes commercial smoke alarms, self-dimming airplane windows, and rear-view mirrors that incorporate cameras. Many auto makers are opting for rear-view cameras incorporated into car dashboards; otherwise, Gentex stock would probably be in the stratosphere.
Still, the Gentex mirror-camera combo has been adopted in six General Motors models, and Gentex hinted that it will report another major adoption in the second quarter. At about $20, or 16 times earnings, the stock looks like a buy to me. The company is debt-free.
The U.S. economy, now entering the eighth year of a slow recovery, is not at the ideal point for temporary-help companies like Kelly Services Inc. (KELYA). That point was passed some time back.
Still, the high cost of health care and pensions gives employers an incentive to use temps instead of permanent employees. And there will always be a “get me some bodies quick” factor. At $22, which is 7 times earnings, this debt-free company looks attractive to me.
Virtually unfollowed on Wall Street is Maui Land & Pineapple Co. (MLP), which has debt equal to about 8 percent of stockholders’ equity. You can ignore the “pineapple” part of the name, as the Hawaiian company hasn’t been in that business since 2009. It is basically a land-development company.
The stock briefly touched $40 more than a decade ago, fell to about $3 a couple of years ago, and stands near $14 today. Earnings are erratic, but I think the stock has speculative appeal at 12 times earnings.
Here’s another debt-free company – Urban Outfitters Inc. (URBN). Based in Philadelphia, the company runs several retail chains, the largest of which are Urban Outfitters and Anthropologie. It is selling more goods online these days, and enjoying it less.
The problem is that online sales have lower profit margins. Still, the company’s return on stockholders’ equity for the past 12 months was near 18%. Every retailer should have such problems.
My May series on low-debt companies has been one of my more successful series.
In 14 outings (1998-2006 and 2012 to the present), my picks have an average 12-month return of 30.5%. The Standard & Poor’s 500 Index has returned an average of 9.3% over the same periods. Figures are total returns including dividends.
My low-debt picks (in the May series) have beaten the index 11 times out of 14, and have been profitable 12 times.
One of the two losing performances came in the past year. In a rising market, four of my five picks fell. The worst loser was Hibbett Sports Inc. (HIBB), down almost 30%. The only gainer was Thor Industries Inc. (THO), up 44%.
In total, my selections lost 10.2% from May 20, 2016 through May 5, 2017. Meanwhile, the S&P 500 climbed 17.5%.
Bear in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Their results shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.
Disclosure: I have no positions in the stocks discussed today, personally or for clients.