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Margaret Moran
Margaret Moran
Articles (239) 

Finding Companies That Can Survive Hard Times

Strong balance sheets are a must-have, and brand names and other assets help

March 19, 2020 | About:

Since U.S. markets peaked on Feb. 19, the S&P 500 has slid approximately 30% as of March 19. Investors are increasingly looking beyond the short-term effects of the novel coronavirus (Covid-19) itself and seeing that shutdowns in businesses and factories are going to significantly impact both supply and demand, a double-hit that the country hasn’t seen since the Great Depression.

Despite the stock market bloodbath, however, U.S. markets have finally entered profitable territory after nearly five years of being overvalued. According to the “Buffett Indicator,” which is called as such because it is Warren Buffett (Trades, Portfolio)’s favored indicator of market valuation, investments in U.S. equity markets will likely return an average of 1.3% per year at the current value. The indicator measures the ratio of total market cap to gross domestic product (GDP), which is 112.7% as of March 19 and indicates that U.S. markets are moderately overvalued.

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During times when earnings fall, businesses are at a higher risk of going bankrupt. Thus, even though there are many potential value opportunities among stocks given recent price declines, the risk of a total loss is higher.

Investors can limit this risk by investing in companies that have strong balance sheets. A great tool for finding such companies is the GuruFocus All-in-One Screener, a Premium feature, which can be used to screen for stocks based on a wide range of criteria.

For this search, I screened for companies with no debt, an Altman Z-Score of at least 10 and a GuruFocus financial strength rating of 10 out of 10. Here are five companies that meet these criteria and are also trading at a low price compared to their historical average price-earnings ratios.

Intuitive Surgical

Intuitive Surgical Inc. (NASDAQ:ISRG) is a leading developer and producer of robotic products for minimally invasive surgery. Based in Sunnyvale, California, it is particularly famous for its da Vinci Surgical System platforms, which altogether have performed more than five million surgeries over the past 20 years.

With a dominant position in the robotic surgery field, an installed base of 5,000-plus units and a high switching cost, Intuitive Surgical is well-positioned to weather hard times while continuing to grow.

On March 19, shares of Intuitive Surgical traded around $406.70 for a market cap of $47.52 billion and a price-earnings ratio of 35.16. Since the markets peaked on Feb. 19, shares are down approximately 33%.

According to the Peter Lynch chart, the stock is undervalued compared to its median price-earnings without non-recurring items.

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The operating margin is 30.69%, the return on capital is 90.91% and the three-year revenue growth rate is 17.7%.

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Monster Beverage

Monster Beverage Corp. (NASDAQ:MNST) is a brand powerhouse in the energy drinks market. Unlike drinks veterans like Coca-Cola (KO), Monster is focused specifically on energy drinks, which allows it to take a more streamlined, low-cost production approach. It is based in Corona, California.

While the company will likely see earnings take a hit as consumers in the U.S., its biggest market, are forced to stay at home, its brand name and balance sheet are strong enough to survive the temporary hit and bounce back quickly.

On March 19, Monster Beverage shares traded around $55.89 for a market cap of $28.61 billion and a price-earnings ratio of 26.92. Since the markets peaked on Feb. 19, shares are down approximately 22%.

The Peter Lynch chart shows that the stock is undervalued compared to its median price-earnings without NRI.

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The company has an operating margin of 33.4%, a return on capital of 237.4% and a three-year revenue growth rate of 14.8%.

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Autohome

Autohome Inc. (NYSE:ATHM) is China’s leading online car sales company. It provides online advertising and dealer subscription services for sellers and a one-stop online shopping spot for buyers, with an emphasis on the new car market.

As the center of the Covid-19 outbreak, China will also likely be the first to see its economy recover from the blow. Autohome’s financial strength, brand name and profitable business model can help it recover faster than competitors.

On March 19, Autohome shares traded around $70.28 for a market cap of $8.30 billion and a price-earnings ratio of 17.78. Since the markets peaked on Feb. 19, shares are down approximately 23%.

According to the Peter Lynch chart, the stock is undervalued compared to its median price-earnings without NRI.

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Autohome has an operating margin of 32.81%, a return on capital of 1424.55% and a three-year revenue growth rate of 23.8%.

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Abiomed

Abiomed Inc. (NASDAQ:ABMD) is the medical devices company that produces heart pumps for use in medical procedures. The Danvers, Massachusetts-based company is the maker of the world’s smallest heart pump.

Though the stock price saw dramatic ups and downs in 2018-19 due to the publication of flawed research on its products from competitors, the Abiomed story is one that has stayed the same since its founding in 1981. It is specifically focused on devices for heart surgery, and its business model has remained consistent and profitable.

On March 19, shares of Abiomed traded around $140.66 for a market cap of $6.28 billion and a price-earnings ratio of 26.48. Since the markets peaked on Feb. 19, shares are down approximately 16%.

The Peter Lynch chart shows that the stock is undervalued compared to its median price-earnings without NRI.

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The company has an operating margin of 30.49%, a return on capital of 109.14% and a three-year revenue growth rate of 31.5%.

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Power Integrations

Power Integrations Inc. (NASDAQ:POWI) is a semiconductor manufacturing company based in San Jose, California. It produced electronic components for use in high-voltage power systems and is a leading producer of high-voltage analog integrated circuits.

The company’s circuits are used in a variety of devices, including smartphones, electric vehicles, solar power systems and high-voltage DC transmission lines. Its production focus is concentrated, but the components have a good mix of applications in both infrastructure and growth markets, giving it good growth potential.

On March 19, shares of Power Integrations traded around $86.79 for a market cap of $2.55 billion and a price-earnings ratio of 13.34. Since the markets peaked on Feb. 19, shares are down approximately 14%.

The Peter Lynch chart indicates that the stock is undervalued.

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Power Integrations has an operating margin of 11.42%, a return on capital of 26.49% and a three-year revenue growth rate of 2.4%.

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Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research or consult registered investment advisors before taking action in the stock market.

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