In this type of market, you want to buy strength, and there's nothing stronger than good businesses that aren't burdened by debt, writes Keith FitzGerald of Money Morning.
Many investors remain on the sidelines, under the impression that every company has been stopped in its tracks by the financial crisis. Somehow they've convinced themselves there's nothing worth owning.
The problem is, it's just not true. Companies that carry little or no debt are kicking butt, and will continue to do so even if the markets stumble. Not only are most of them tacking on solid numbers in very volatile markets, but over time these debt-free companies are proving themselves to be stable and reliable performers.
Take last year, for example. The S&P 500 returned 2%. Yet, the top 15 firms as measured by the highest amount of cash and short-term investments as a percentage of total assets returned an average of 15%, according to CNBC analyst Giovanny Moreano. That's 650% more than their debt-laden brethren over the same time frame.
So far this year, my favorite debt-free companies have tacked on average gains of 19.82%, versus the S&P 500, which was up 9% as of July 3. That's a 120% advantage over the same time period.
Going further back, these same companies have done even better. In fact, my favorite debt-free choices have returned an average of 349.16% versus a loss of -3% for the S&P 500 as a whole since the top of 2007, when the financial crisis broke. Over the past decade, that number jumps to over 2,061%.
And I'll bet you dimes to Bernanke dollars that these same debt-free companies will pull ahead further in the years to come.
Debt-Free Companies Deliver
Like their financial cousins, the Dividend Royalty I write so often about, debt-free companies generally produce tremendous total returns over time.
They have damn near indestructible balance sheets that typically translate into stable cash flow, higher, more consistent yields, and increasing wealth. The comparatively high cash positions they maintain allows them the flexibility to fund acquisitions and other growth-inducing expansion plans at a time when lesser competitors are hunkering down.
Do not underestimate the impact of having such Steady Eddies in your portfolio if you're planning for retirement, or are already there. When a company has no debt, it has every incentive to enhance shareholder wealth, and none of the drawbacks that come with having to please lenders—including bondholders—because there aren't any.
Another added benefit most people don't recognize (but should) in today's crippled markets is that debt-free companies can restructure and shift gears quickly and efficiently, often without the interruption that comes with having to negotiate with lenders.
And finally, no-debt winners usually have low volatility which makes them ideal anchors for any savvy investor's portfolio.
Here are four of my current favorites to get you started:
CH Robinson (CHRW)
This transportation logistics firm has been beaten mercilessly since the financial crisis began, and now trades at $61.24. It's sitting on $311.36 million in cash and short-term investments equal to 14.56% of assets. It's got 37,000 customers and over 200 regional offices that ensures it exposure in the Americas, Europe, and Asia.
Despite the fact that it's obviously at risk from a further decline in shipping volumes if the economy rolls over, I like the 2.3% dividend it kicks off and the fact that net revenues have grown at 16% compounded for the past 20 years.
Apple Computer (AAPL)
Cupertino-based Apple has truly changed the landscape when it comes to intelligent devices. The company finished the second quarter with $110 billion in cash, short-term marketable securities, and long-term marketable securities, equal to 72.88% of total assets.
It's got one of the most recognized brands in the world, and is constantly reinventing itself. Many people thought the company would fail following Steve Jobs' unfortunate death, but those fears appear to have been overblown so far.
Mastercard (MA)
Many investors simply don't think about the piece of plastic they hold in their pockets as an investment. But they should. Mastercard has $5.18 billion in cash and short-term investments equal to 46.54% of total assets.
Like many debt-free companies, the story is pretty compelling: increasing earnings, gobs of cash on hand, and high margins. The world is transitioning to e-payments, and this company has a stranglehold on how money moves at a time when its name has developed into a significant global brand with worldwide recognition.
Sturm, Ruger & Co (RGR)
This company holds $95.83 million in cash and short-term investments equal to 43.28% of total assets. Plus, it's got a 3.2% dividend.
At a time when others are quaking in their boots, this firearms maker is raising its dividend, buying back stock, and picking off competitors one by one—pun absolutely intended. It's a natural when it comes to capitalizing on political instability and the societal fears of a Greek-style meltdown. Its product lines sell out quickly, and there's even a backlog.
The point is, there's something to own in every market—and in today's environment, low-debt and no-debt companies are a great place to start.
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