Several factors in the markets indicate precarious times may be ahead. For value investors, that means stocks with sound balance sheets and ample profitability will start to look more attractive.
Looming largest for stocks are trade tussles that could escalate into full-blown wars, higher interest rates and sinking commodities. The S&P 500 sank almost one percent since Monday as President Trump announced $200 billion in additional tariffs on Chinese goods Tuesday. Retaliatory import duties on U.S. goods have already started to act on U.S. companies, with Daimler AG issuing a profit warning as China hits its SUBs with tariffs.
A week after raising interest rates 0.25%, Federal Reserve Chairman Jerome Powell said Wednesday the case for further increases is “strong.” While higher rates may help financials stocks, Warren Buffett (Trades, Portfolio) has called them “gravity” on the market.
“[Interest rates] act on financial valuations the way gravity acts on matter: The higher the rate, the greater the downward pull,” Buffett told CNN Money. “That’s because the rates of return that investors need from any kind of investment are directly tied to the risk-free rate that they can earn from government securities. So if the government rate rises, the prices of all other investments must adjust downward, to a level that brings their expected rates of return into line.”
Commodities, which also tend to fall when investors expect an economic downturn or rising trade tensions, have declined. West Texas Intermediate crude slumped 1.5% in the past week and 8.8% in the past month, while the price of gold has declined 2.9% over the past week and 1.82% over the past month.
Companies with considerable financial strength best weather market downturns. As Peter Lynch has said, “Companies that have no debt can’t go bankrupt.”
From the All-in-One Screener come five large-cap companies with the highest financial strength, profitability and predictability rankings, with debt-to-equity ratios below 1.4 and free cash flow growth above 15%. The companies that made the cut are: Monster Beverage Corp. (MST, Financial), Skyworks Solutions Inc. (SWKS, Financial), IPG Photonics Corp. (IPGP, Financial), Alphabet Inc. (GOOGL, Financial) and Ulta Beauty Inc. (ULTA, Financial).
Monster Beverage Corp. (MST, Financial)
Monster Beverage Corp., the maker of energy drinks, has a financial strength rating of 9/10, profitability rating of 9/10 and predictability rank of 3.5, with 25% five-year free cash flow growth rate.
The company’s balance sheet shows $1.10 billion in cash and zero long-term debt. It also has a price-earnings ratio of 37.3 and price-book ratio of 8.2.
GuruFocus investors with the largest positions in this stock are Frank Sands (Trades, Portfolio), Spiros Segalas (Trades, Portfolio) and Jeff Auxier (Trades, Portfolio).
Skyworks Solutions Inc. (SWKS, Financial)
Skyworks Solutions makes semiconductors that are used in wireless handsets and has an $18 billion market cap.
Skyworks has a financial strength rating of 9, profitability rating of 9 and predictability rank of 3-stars. Over the past five years, it grew free cash flow at a rate of 40%.
The company’s balance sheet has $1.88 billion in cash and no long-term debt. It has a price-earnings ratio of 21.04 and price-book ratio of 4.44.
GuruFocus investors with the largest positions in the company are Manning & Napier Advisors, Richard Snow (Trades, Portfolio) and John Hussman (Trades, Portfolio).
IPG Photonics Corp. (IPGP, Financial)
IPG Photonics makes fiber lasers and amplifiers used in industries ranging from manufacturing to aerospace and has a market cap of $12.6 billion.
IPG Photonics has a financial strength rating of 9, profitability rating of 9 and predictability rank of 5/5. Its five-year free cash flow growth rate totaled 29%.
Its balance sheet shows $1.18 billion in cash and long-term debt of $44 million. It also has a price-earnings ratio of 33.95 and price-book ratio of 5.86.
GuruFocus investors with the largest positions in the company are Columbia Wanger (Trades, Portfolio), Chuck Royce (Trades, Portfolio) and Ken Fisher (Trades, Portfolio).
Alphabet Inc. (GOOGL, Financial)
Alphabet, the search engine company, has a market cap of $809.63 billion. It has a financial strength rating of 9, profitability rating of 8 and predictability ranking of 3-stars. Its five-year free cash flow growth rate is 17%.
The company has a financial strength rating of 9 and profitability rating of 8, with a predictability rank of 3-stars.
Alphabet’s balance sheet shows $102.89 billion in cash and $3.94 billion in long-term debt. It has a price-earnings ratio of 49.71 and price-book ratio of 5.07.
GuruFocus investors with the largest positions in the company are Stanley Druckenmiller (Trades, Portfolio), Glen Greenberg and Ruane Cunniff (Trades, Portfolio).
Ulta Beauty Inc. (ULTA, Financial)
Ulta, the hair and beauty company, has a $15.07 billion market cap. Its financial strength rating is 9, profitability rating is 8 and predictability ranking is 5-stars. The company’s five-year free cash flow rate is 41%.
Ulta’s balance sheet holds $469 million in cash and no long-term debt. It has a price-earnings ratio of 26.6 and price-book ratio of 8.49.
The GuruFocus investors with the largest positions in the company are Mario Cibelli (Trades, Portfolio), John Griffin (Trades, Portfolio) and Columbia Wanger (Trades, Portfolio).
See more about the stocks in this screen here.
