Facebook and Alphabet are Balance-Sheet Powerhouses
Posted: February 14, 2017
In football, quarterbacks get all the attention. Linemen, though they play a crucial role, get only a little.
It’s the same in business. Companies with fast-growing earnings get lots of ink and investor interest. No one pays much attention to companies with great balance sheets.
To rectify this injustice, I have for years published an annual list of Balance Sheet Powerhouses. Among the familiar names that have graced the list in the past were Apple Inc. (AAPL), Microsoft Corp. (MSFT) and TK.
The criteria have evolved slightly over the years, but haven’t changed radically. To make the list nowadays a company must pass six tests:
• Domiciled and listed in the United States.
• Market value of at least $1 billion.
• $300 million in cash or near-cash.
• Total debt less than 10 percent of stockholders’ equity — A current ratio (current assets divided by current liabilities) of 2.0 or better.
• Earnings of at least 10 cents a share in the latest fiscal year.
Of the more than 2,000 U.S. companies with a market value of $1 billion or more, only 31 made the Balance Sheet Powerhouses list this year.
The best-known winners were Alphabet Inc. (GOOG) and Facebook Inc. (FB).
I think Alphabet, the parent of Google, is a spectacular company. That doesn’t necessarily mean it’s a good stock, because it’s on the pricey side.
More overpriced, in my opinion, is Facebook. It fetches 41 times earnings, six times book value (corporate net worth per share) and almost 14 times revenue. Personally, I think its site is clumsily organized and potentially vulnerable to competition.
I’ve compiled the Balance Sheet Powerhouse list 12 times before (2001-06 and 2011 to the present). The champion for most appearances on the list is Qualcomm Inc. (QCOM), which made it 10 times. Qualcomm has missed the last two years, though. Its debt is 37 percent of equity.
Among current honorees, AVX Corp. (AVX) and Gentex Corp. (GNTX) lead the field, each returning for a seventh appearance.
AVX, based in Fountain Inn, S.C., makes electronic components such as ceramic and tantalum capacitors. Gentex, out of Zeeland, Mich., makes electronics for cars, such as automatic-dimming rearview mirrors and side-blind-zone alerts.
Back for a sixth time are Alphabet and Dolby Laboratories Inc., which specializes in sound processing systems.
Cognizant Technology Solutions Corp. (CTSH) makes its fifth appearance. It is an information technology consultant and outsourcing company.
Making their fourth appearance are Expeditors International of Washington Inc. (EXPD), Intuitive Surgical Inc. (ISRG), Linear Technology Corp. (LLTC), SEI Investments Co. (SEIC) and Skyworks Solutions Inc. (SWKS).
Three-time winners are Coherent Inc. (COHR), Foot Locker Inc. (FL) and Guess? Inc. (GES).
Second-timers are Align Technology Inc. (ALGN), Arista Networks Inc. (ANET), Columbia Sportswear Co. (COLM), Ellie Mae Inc. (ELLI), Facebook and IPG Photonics Corp. (IPGP).
Making the Powerhouse list for the first time are Ambarella Inc. (AMBA), Ansys Inc. (ANSS), Cirrus Logic Inc. (CRUS), Dril-Quip Inc. (DRQ), Epam Systems Inc. (EPAM), ICU Medical (ICUI), MicroStrategy Inc. (MSTR), Monster Beverage Corp. (MNST), Scholastic Corp. (SCHL), Skechers USA Inc. (SKX), TripAdvisor Inc. (TRIP) and United Therapeutics Corp. (UTHR).
Making the Powerhouse list is an honor, but doesn’t necessarily mean that the stock is a good buy. Many of these companies are known to be excellent and therefore are high priced.
Each year I pick a few of the Powerhouse stocks to recommend — usually only three. My recommendations have returned an average of 16.7 percent, including reinvested dividends, versus 8.4 percent for the Standard & Poor’s 500 Index over the same 12 one-year periods.
In 12 outings, six of my columns have beaten the S&P 500 and seven have been profitable.
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.
For the coming year, the three Powerhouse stocks I like best are Foot Locker, Skyworks Solutions, and Guess? Inc.
Foot Locker appeals to me because retailing stocks are despised by investors at the moment. People seem to think that all sales in the future will be made via the Internet. I figure that’s less true for items where “fit and feel” are important, and I think athletic shoes qualify.
Skyworks Solutions has been growing its revenue at a 22 percent clip the past three years. It makes chips used in mobile phones and other wireless devices. Growth is especially strong in Asia. At 19 times recent earnings and 15 times this fiscal year’s estimated earnings, the stock isn’t terribly expensive.
As a comeback story, I like Guess? Inc., the jeans maker. Its clothes have been losing popularity: Both sales and earnings have been going backwards. Analysts foresee only a modest comeback in 2018. But I like the 6.7 percent dividend yield. And the stock sells for only 0.5 times revenue.
Disclosure: My firm owns Guess? Inc. and Skyworks Solutions in one or more client portfolios.