Low-debt stock picks outperform Standard & Poor’s 500 for 10th time
Posted: May 05, 2015
One criterion I feel strongly about in picking stocks is low debt.
Companies that don’t have much debt are not at the mercy of their banks and bondholders. They are free to make strategic moves, including acquisitions of struggling competitors. And they can often afford to increase dividends or do capital projects.
Starting in 1998, I’ve written a dozen columns recommending low-debt stocks. My picks have been profitable 11 times out of 12 and have beaten the Standard & Poor’s 500 Index 10 times out of 12.
The average one-year return on my low-debt recommendations has been 36.1 percent, compared with 9.3 percent for the S&P 500 in the same 12 periods.
Frankly, this is better performance than I expected. The low-debt series has been one of my best-performing series of columns.
Bear in mind that performance of my column recommendations is a hypothetical calculation, untouched by taxes, commissions or other transaction costs. Past performance does not predict future results. And my column results should not be confused with the returns I earn for clients.
THANKS, CHINA
My picks last year rose a little more than 18 percent, thanks mostly to a gain of more than 58 percent in the American depositary receipts of China Mobile. China’s stock market has been the world’s best performing of late.
PC Connection Inc. (PCCC) also did well; it is up about 25 percent. My worst performer was ITT Corp., down about 7 percent. In the middle were Magellan Health Services Inc. (MGLN) and Magna International Inc. (MGA), up about 8 percent and 6 percent, respectively.
The S&P was up a bit more than 15 percent for the period, May 5, 2014, through May 1.
DISTILLING ALCOHOL
At the moment, 14 percent of U.S. stocks qualify as low-debt by my definition (debt no more than 10 percent of stockholders’ equity), and 5 percent are debt-free. Here are a few I like.
MGP Ingredients Inc. (MGPI) of Atchison, Kan., is a distiller whose alcohol goes into many brands, some publicly disclosed, others not. It is a small-cap stock, with a market value of $261 million.
MGP doesn’t show much growth but has good profitability. Last year, it earned 25 percent on stockholders’ equity. As far as I can tell, no Wall Street analysts cover it, which can be a good sign, according to some academic research. Debt is just less than 10 percent of equity.
PIGS AND SHIPS
Carrying less than 3 percent debt to equity is Seaboard Corp. (SEB), a mini-conglomerate whose main activities are raising chickens and pigs. The stock is often cheap and is especially so now because an outbreak of avian flu is depressing the stock prices of chicken companies.
I’ve owned Seaboard in the past and currently own it for one client. One interesting wrinkle is that the company has a subsidiary that does shipping to and from Latin American ports. This operation could perk up quite a bit if Cuba and the United States continue to improve relations.
CALLING CHEAP
IDT Corp. (IDT) is a telecommunications company based in Newark. The core of its business is international calling cards that let people from, say, Guatemala or Ghana, call home at low cost. A big chunk of its customers live in the New York City area, but there is lots of room to expand the concept.
On the bad side, the company has a spotty earnings history, and the stock nearly vaporized during the financial crisis. On the good side, profitability currently looks good and the balance sheet is muscular, with about $500 million in cash and current assets. Debt is less than 5 percent of equity.
‘CANDY CRUSH’
I have never played the video game “Candy Crush Saga,” but millions of people have. It can be played on Facebook, smartphones and other platforms.
King Digital Entertainment plc of Dublin makes this game and others, which are popular in the United States, Britain, Germany and other countries. For King, which trades in the United States under the symbol KING, it adds up to a $5 billion market capitalization.
King earned $575 million last year on sales of $2.27 billion. The stock trades at an attractive multiple of nine times earnings, and the company has no debt.
HERITAGE
Also debt-free is Heritage Insurance Holdings Inc. (HRTG) of Clearwater, Fla. It’s a small property and casualty insurance company with a market value of $611 million.
I have to admit that Florida weather makes me nervous about property insurers. It takes only one hurricane to wreck a fiscal year, let alone three or four storms. However, Heritage attracts me because it has about $5 a share in cash, about a quarter of the recent stock price, $20.54.