These Low-Debt Selections are Batting .800
Posted: May 24, 2018
By John Dorfman
May 7, 2018 (Maple Hill Syndicate) – Every week, almost every day, I get robocalls offering my company financing with no questions asked.
I’d be glad to have the money – I’d hire another person in an instant – but I don’t relish paying it back. My company is debt free and probably always will be.
Most companies aren’t. In the era of super-low interest rates, which began in 2008 and perhaps is drawing to an end now, companies took advantage of low rates to borrow a lot of money.
That wasn’t necessarily wise. If the loans carried a floating rate, the burden of debt service will probably rise. Even with fixed-rate loans, the companies may have to refinance the debt on unfavorable terms. And low-debt companies enjoy strategic flexibility.
Each May I recommend a few stocks of low-debt companies. My picks from the 15 previous columns on this subject have averaged a total one-year return of 30.0%, compared to 9.6% for the Standard & Poor’s 500 Index over the same 15 periods.
My low-debt picks have beaten the index 12 times out of 15, so I’d say they are batting .800. They have been profitable 13 times.
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.
buy Lyrica online australia Last Year
Last May I recommended four low-debt stocks, which collectively returned 23.1%. Big gains in Urban Outfitters Inc. (URBN, up 66.6%) and Kelly Services Inc. (KELYA, up 38.9%) propelled the return, overcoming a major loss in Maui Land & Pineapple Co. (MLP, down 28.7%).
The fourth stock, Gentex Corp. (GNTX) was up 15.83%, just edging out the S&P 500 at 13.3%.
And now its time for some new low-debt recommendations.
follow CME Group
I can remember when the Chicago Mercantile Exchange, Chicago Board of Trade, New York Mercantile Exchange and Commodity Exchange (Comex) were four separate and competing exchanges. Now CME Group Inc. (CME) owns all of them.
The Chicago-based company that will probably have well over $4 billion in revenue this year. It has fat profit margins, health profits, and debt just at my limit for this low-debt list, 10 percent of equity. The stock sells for 13 times earnings.
Foot Locker’s problems are raging competition from online shoe vendors (now close to one third of the shoe market), and tough price competition among brick-and-mortar shoe chains. Analysts think Foot Locker’s profit will drop to $3.99 a share this year from $4.82 last year, then rebound to $4.50 in 2019.
I think it’s encouraging that Foot Locker sold more than $1 billion of shoes online last year (versus $6.7 billion in stores) and that online sales are growing at an 8% clip. I believe Foot Locker will continue to improve in the online market.
Debt is only 5% of stockholders’ equity, and the stock sells for about 10 times earnings.
Kulicke & Soffa
Based in Singapore, Kulicke & Soffa makes wafer saws, bond equipment, and other equipment for the semiconductor industry. The stock has been on a long strange trip – above $21 a share in 1999, down to below $2 in 2008, and now after a long climb back above $24.
Analysts expect Kulicke’s profits to rise this year and next, so I think the stocks valuations are pretty reasonable at 11 times earnings, 1.9 times revenue and 1.9 times book value (corporate net worth per share). The company has no debt.
Based in Beijing, China, Cheetah Mobile Inc. (CMCM) provides an Internet browser and Internet security products. It offers applications for mobile gaming and photo collages. Last year it pulled in $750 million in revenue, up from $22 million only six years earlier.
The company’s operating history is relatively short and profits have been inconsistent. Analysts look for $3.55 a share in earnings this year and $4.52 next year, which makes the stock look pretty cheap to me at the recent price of $12.28.
Few U.S. analysts follow this stock, and it currently has no “buy” ratings. Debt is 8% of equity, but here’s what I especially like: The company has $352 million in total liabilities and $356 million in cash.
Ituran Location and Control Ltd. (ITRN), with headquarters in Azor, Israel, sells global positioning systems. Its main emphasis is on fleet management and stolen-vehicle recovery.
I like the upward thrust of sales and earnings in the past couple of years. Although the stock is listed in the U.S., Ituran gets about half its revenue in Israel, and most of the rest in Brazil and Argentina. The company is debt free.
Disclosure: For a couple of my clients, I own shares of Foot Locker, Kulicke & Soffa and Maui Land & Pineapple. I don’t personally own any of the stocks discussed in today’s column.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at firstname.lastname@example.org.