Stock Picks Boast Profitability, Low Debt
Posted: June 21, 2016
Let’s imagine that you run a computerized dating service with 1,000 subscribers. You might know that 18 percent are blonde, 37 percent are tall, and 10 percent have an intelligence quotient over 120.
If you have a demanding customer who wants all three of those characteristics, perhaps only six or seven people in your database would do.
It’s much the same with stock screening. Suppose you want to invest in a company that’s unusually profitable, has very little debt, and sells for a reasonable price.
Of the 3,684 U.S. stocks with a market value of $250 million or more, only 394 have a return on stockholders’ equity of 25 percent or better.
Only 64 of those stocks have debt that doesn’t exceed 10 percent of stockholders’ equity (corporate net worth).
If you’re fussy about valuations, as I am, you’ll note that only 35 of those stocks sell for 20 times earnings or less.
Today I want to focus on five of those stocks.
Terra Nitrogen
After sojourning above $200 a share during much of 2012-13, Terra Nitrogen Co. LP (TNH) has subsided to about $110 a share. At this price, the Deerfield, Ill.-based fertilizer maker trades for less than 12 times earnings and its dividend of almost $10 a share provides an 8.7 percent dividend yield.
Whether the dividend can be sustained is a legitimate question; the company is straining to pay it.
But in a world with growing population and limited land, fertilizer seems a sound business.
In the past 12 months, Terra has earned a 47 percent return on equity, and it has done that well or better in nine of the past 15 years. The company is debt-free.
Francesca’s Holdings
From its headquarters in Houston, Francesca’s Holdings Corp. (FRAN) operates more than 600 retail boutiques that sell clothing, jewelry, accessories and gifts. It caters mainly to women 18 to 35, and tries to give each store a unique feeling rather than a chain atmosphere.
In the past four quarters, the company has earned a 31 percent return on equity, and it has no debt.
Retailing can be a fickle business; it is hard to stay “trend-right,” as the company likes to say. That’s probably why the stock goes for only 12 times earnings, despite its enviable record.
Ituran Location & Control
Ituran Location & Control Ltd. (ITRN), based in Israel, makes systems for tracking and recovering stolen cars. Its technology was originally developed by the Israeli armed forces to locate downed pilots. It also makes remote meter-reading equipment.
Ituran sells its systems in Israel, Brazil, Argentina and the United States. The stock fetches about 19 times earnings and six times book value (corporate net worth per share) — more than I personally would pay. But the return on equity is running at nearly 30 percent and the company is debt-free.
Two repeats
Two stocks that I recommended in a May column on low-debt companies meet the criteria for today’s column, and I am happy to repeat those recommendations.
Michael Kors Holdings Ltd. (KORS), based in London, designs and sells shoes, accessories and clothing in the United States, Canada, Europe and Japan. It boasts a return on equity of nearly 40 percent, and has barely a sliver of debt.
Taro Pharmaceutical Industries Ltd. (TARO) of Israel makes generic and proprietary drugs. One of its specialties is dermatological ointments but it also makes cardiovascular and neuropsychiatric drugs. With a 32 percent return on equity, it is debt-free.
Track record
This is the 12th column I’ve written since 2000 on stocks with high profitability and low debt. Seven of the previous 11 columns have been profitable in the 12 months following publication, and seven have beaten the Standard & Poor’s 500 Index.
The average one-year return on my recommendations in this series has been 12.0 percent, compared with 6.9 percent for the Standard & Poor’s 500 Index.
Last year’s list was a dud. Half the stocks were up but a 76.1 percent loss in NewLink Genetics resulted in a 19.1 percent loss overall.
Bear in mind that results for my column picks are theoretical and don’t reflect actual trades, trading costs or taxes. The record of my column selections shouldn’t be confused with the performance I achieve for clients. And past performance doesn’t guarantee future results.
Disclosure: My colleague Tom Macpherson owns Terra Nitrogen in the Nintai Charitable Trust, which he manages. I currently have no positions in the stocks discussed in today’s column, personally or for clients.
Correction: In last weeks’ column, I incorrectly described the business of Syntel Inc. (SYNT). It is a knowledge processing outsourcing (KPO) company, whose services include programming, systems integration and project management.