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John Dorfman
John Dorfman
Articles (227)  | Author's Website |

Alphabet and Dolby Lead the Balance Sheet Powerhouses

While many individuals and governments have fallen deeply into debt during the pandemic, many companies have strengthened their balance sheets

While many individuals and governments have fallen deeply into debt during the pandemic, many companies have strengthened their balance sheets.

Each year (2001 through 2006 and 2011 to the present), I've compiled a list of companies that qualify as Balance Sheet Powerhouses. Until now, the largest number of companies that made the list was 42, in 2006. This year, 61 companies made the honor roll.

I enjoy compiling this list because I believe that investors pay slavish attention to every tick in a company's earnings and not enough attention to a company's balance sheet (assets versus liabilities).

Repeat winners

A few companies have qualified as Balance Sheet Powerhouses year after year.

Alphabet Inc. (NASDAQ:GOOGL), the parent of Google, You Tube and Waymo, makes my list for the 10th time. Less well known is Dolby Laboratories Inc. (NYSE:DLB), which makes sound systems for movies, broadcasts and video games. It, too, is a 10-time winner.

Gentex Corp. (NASDAQ:GNTX), which makes self-dimming mirrors for cars, has earned a spot nine times. SEI Investments Co. (SEI), an investment consultant, and Skyworks Solutions Inc. (NASDAQ:SWKS), which makes semiconductors for wireless communication, are back for number eight.

Surgical instrument maker Intuitive Surgical Inc. (NASDAQ:ISRG) joins the list for a seventh year. Social-media app Facebook Inc. (NASDAQ:FB) is onboard for trip number six.

There are three five-time winners: Arista Networks Inc. (NYSE:ANET), IPG Photonics Corp. (NASDAQ:IPGP) and UniFirst Corp. (NYSE:UNF).

Powerhouse picks

To make the Balance Sheet Powerful list is an honor, but not necessarily a buy recommendation for the company's stock.

Many of the companies on this list have high-priced stocks. So each year, I recommend only a few Powerhouse stocks that I think have room for price appreciation – usually two or three.

Last year I recommended Alphabet, Franklin Resources Inc. (NYSE:BEN) and Skyworks Solutions. Alphabet scored a 38% return from Feb. 10, 2020 through Feb. 5, 2021. Skyworks surged 56%. Franklin Resources managed a 6.5% return.

Collectively, my picks returned 33.5%, outdistancing the 18.0% return on the Standard & Poor's 500 Index.

Bear in mind that my column recommendations are hypothetical: They don't reflect actual trades, trading costs or taxes. These results shouldn't be confused with the performance of portfolios I manage for clients. Also, past performance doesn't predict future returns.

In 16 years, my picks in this series have averaged a 14.3% return, versus 10.0% for the S&P 500. My selections have been profitable 10 times and have beaten the index seven times.

Cannae

This year, I will recommend only two stocks from the Powerhouse list.

An off-the-beaten-path pick is Cannae Holdings Inc. (CNNE), a conglomerate that gets most of its revenue from the restaurant business, but most of its stock market value from its stakes in other businesses.

Cannae owns majority stakes in the 99 Restaurants chain and the O'Charley's chain, plus significant minority stakes in Ceridian HCM Holding Inc., Dun & Bradstreet, Amerilife, CorroHealth and Optimal Blue.

CEO William Foley II loves to wheel and deal, so expect the constellation of businesses here to be an ever-changing one.

The market values Cannae at less than three times earnings – a puny multiple that I believe reflects the fact that investors are never sure what the company will look like next year. It also reflects the current agony of the restaurant business, but I figure that will improve in a few months.

Alphabet

I repeat my recommendation of Alphabet from last year. I like it even though it sells for 36 times recent earnings, way above my normal limit of 15. I regard Alphabet as the supreme example of an innovative company.

Its Google search engine is the overwhelming leader in the U.S., and one of the leaders worldwide. Its You Tube video platform is the modern equivalent of the town-square bulletin board. Its Waymo driverless car project appears to be ahead of competitors.

Also, Alphabet is in the forefront of research on artificial intelligence, partly through its Deep Mind unit. Here I have a potential source of bias: My oldest daughter works for Deep Mind.

Powerhouse criteria

Using screening software from Zacks.com and GuruFocus.com, I looked for stocks that met six tests. Any company that passes all six qualifies as a Balance Sheet Powerhouse.

  • $300 million or more in current assets.
  • Debt no more than 10% of stockholders' equity.
  • Market value of $1 billion or more.
  • Current ratio (current assets divided by current liabilities) of 2.0 or better.
  • Positive earnings of at least ten cents a share in the latest fiscal year.
  • Headquartered in the U.S.

Disclosure: I own Alphabet personally and for most of my clients. One or more of my clients owns shares in Cannae, Franklin Resources and Skyworks Solutions.

John Dorfman is chairman of Dorfman Value Investments LLC in Boston, Massachusetts. He or his clients may own or trade securities discussed in this column. He can be reached at [email protected].

About the author:

John Dorfman
John Dorfman founded Dorfman Value Investments in 1999. Previously he was a Senior Special Writer for The Wall Street Journal, executive editor of Consumer Reports, and a managing director at Dreman Value Management. His syndicated column appears on Tuesdays on this website and also in the Pittsburgh Tribune Review, Ohio.com, Virginian Pilot and Omaha World Herald.

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