Insights and Thoughts from Dorfman Value Investments
John Dorfman writes a syndicated column that appears weekly in Forbes.com, GuruFocus.com, Ohio.com, the Omaha World Herald, the Pittsburgh Tribune Review and the Virginian Pilot. In it, he tries to provide original, profitable stock ideas for readers. In contrast to almost all other investment columnists, he systematically reports on past results, both good and bad.
Recent columns are archived here.
Now’s the Time for Low-Debt Stocks to Pay Off
Posted: May 11, 2022
May 9, 2022 — (Maple Hill Syndicate) – Companies with high debt lived in a sort of paradise in 2019-2021. With interest rates extraordinarily low, their debt burden didn’t hurt.
Now it looks as if it was a fool’s paradise. Interest rates are rising, and the debt burden is beginning to bite.
I relish low-debt companies. They have little risk of bankruptcy and they enjoy strategic flexibility. They won’t need to sell a promising division to raise cash. If they ever need to borrow, the rate they pay should be reasonable.
The average company today has debt equal to about 60% of stockholders’ equity (corporate net worth). In today’s column, I highlight five companies with debt of 10% of equity or less.
Gilead Sciences Inc. (GILD) has disappointed its investors with a 2% cumulative return over the past three years. By contrast, the Standard & Poor’s 500 Index returned 48% over that period.
And yet, Gilead is riding a 15-year profit streak. It earned more than 10% on invested capital in nine of the past ten years. And it has no debt whatever.
Gilead’s best-selling drugs are for the prevention and treatment of HIV infections. Veklury, for the treatment of Covid-19, also made a significant contribution to revenue last year. Its product line is diverse, and there are several potential cancer drugs in its pipeline.
The stock sells for 17 times recent earnings, but less than 10 times the earnings analysts expect for the year ahead.
Based in Cambridge, Massachusetts, Moderna Inc. (MRNA) burst into prominence when it developed one of the two leading vaccines for Covid-19. The company’s revenue was less than $1 billion through 2020, then jumped to $18.4 billion in 2021. For the past four quarters, it’s $22.6 billion.
Investors expect the stage coach to turn into a pumpkin when the pandemic fades. That’s why Moderna shares fetch a mere four times recent earnings.
Their fears could be right, but I think the research prowess Moderna displayed in developing its Spikevax Covid-19 vaccine will lead to other big hits.
Alpha & Omega
As a speculation, Alpha & Omega Semiconductor Ltd. (AOSL) interests me. Based in Sunnyvale, California, this chip maker has a market value of just over $1 billion, making it (just barely) a mid-capitalization stock.
Its profit history is spotty. It went public in 2010. Since then it’s had two years I’d consider great, one year I’d consider good, four loss years, and five years I’d consider mediocre.
The company’s return on invested capital has been good (about 13%) in the past four quarters. It has brought down its debt to 4% of stockholders’ equity. Wall Street mostly ignores the company. Only four analysts publish opinions; three of those rate the stock a buy.
Another company with an unimpressive history but good results recently is Intrepid Potash Inc. (IPI). Russia and Ukraine have historically been big producers and exporters of fertilizer. With the two at war and Russia under sanctions, that’s unlikely to be true in the near future.
Fertilizer prices have been rising fast. Most investors who want to play this theme will turn to big-company stocks such as CF Industries Holdings Inc. (CF) and Mosaic Co. (MOS).
Intrepid Potash is far smaller than these, and riskier, but I like it that the stock is cheap (less than four times earnings) and the company is debt-free.
Sanderson Farms TK (SAFM), a chicken producer, agreed last year to be acquired by a joint venture of Cargill and Continental Grain (both privately owned). The agreed price was $4.53 billion or $203 per share in cash.
The stock, however, was trading at $188.50 as of May 6. So, investors have $14.50 of doubt that the deal will go through.
If the acquisition is consummated, that would be a 7.7% arbitrage profit. If it happens within six months, it’s 15% annualized. If the deal doesn’t go through, I’d still be happy to own Sanderson, which I’ve owned several times in the past.
I’ve written 19 columns about stocks with low debt. The average 12-month return on my picks has been 27.1%, which compares very favorably with 10.7% for the Standard & Poor’s 500 Total Return Index.
Fifteen of my 19 columns have shown a profit, and 13 have beaten the S&P 500.
Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.
My column from a year ago was one of the four that showed a loss. All four of my picks declined, with the booby prize going to Logitech International SA (LOGI), down 44%. Also in the red were T. Rowe Price Group Inc. (TROW), Sturm Ruger & Co. (RGGR) and Bio-Rad Laboratories (BIO).
Disclosure: I own Moderna and Sanderson Farms personally, and in a hedge fund I run. (In the hedge fund, the Moderna position is in the form of call options.)
John Dorfman is chairman of Dorfman Value Investments LLC in Boston, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at email@example.com.