For the past half dozen years, investors couldn’t care less about a company’s balance sheet.
But now that interest rates are rising, companies with lots of cash and little debt will increasingly hold the advantage. You’ll find 32 such companies this year on my annual list that I call Balance Sheet Powerhouses.
To make this honor roll, a company must have $300 million in current assets – cash or things that can easily be converted to cash. They must also meet four other criteria, two of which were tightened this year.
- Headquarters in the U.S.
- A market value of $5 billion or more (increased from $1 billion).
- Earnings of at least 20 cents a share in the latest fiscal year (increased from 10 cents).
- Debt no more than 10% of stockholders’ equity (corporate net worth).
One company has made the honor roll 11 times, more than any other company. That is Dolby Laboratories Inc. (DLB, Financial) of San Francisco, which makes stereo and surround-sound systems for homes, cars and movie theatres. Dolby’s debt is only 3% of equity, and it has just over $1 billion in cash.
SEI Investments Co. (SEIC, Financial), an investment consulting company with headquarters in Oaks, Pennsylvania, makes the honor roll for a ninth time. It has earned more than 30% on invested capital for eight years running.
The companies on the Powerhouse list deserve to be honored for building wealth. That doesn’t mean that all of their stocks are necessarily a buy. Some are already lavishly valued.
Each year, I recommend one to four stocks from the Powerhouse list for possible purchase. This year, I like three.
Bio-Rad Laboratories Inc. (BIO, Financial), based in Hercules, California, is a three-time winner. It makes products used in medical testing, and products used in biotech research and food testing. Profits were mostly mediocre until Covid-19 hit; since then, they have been spectacular.
Investors obviously view Bio-Rad as a flash in the pan, but I think it can settle in to earnings between the old and the recent levels. At about $630 a share, the stock sells for less than three times recent earnings.
Incyte Corp. (INCY, Financial), from Wilmington, Delaware, develops dermatology and anti-cancer drugs. Its main drug, Jakafi, marketed with Novartis, treats rare blood cancers. Its stock sells for 16 times earnings. Debt is 1% of equity.
First Solar Inc. (FSLR, Financial), based in Tempe, Arizona, makes this list for the fourth time. The company makes large-scale, thin-film solar panels. The stock sells for 16 times earnings, and I like it because I think solar power is gaining adherents among companies and government bodies.
In 17 years, my selections have averaged a 13.6% return in the 12 months following publication. That beats the 10.3% average for the Standard & Poor’s 500 Total Return Index over the same years.
Of my 17 sets of selections, 11 have been profitable. Only seven have beaten the S&P.
A year ago, I recommended two stocks, Alphabet (GOOGL, Financial) and Cannae Holdings Inc. (CNNE, Financial). Alphabet did fine, returning almost 34%. But Cannae fizzled, losing more than 29%. So my average was a 2% gain, versus close to 18% for the benchmark.
Neither Alphabet nor Cannae is on the roster this year. Alphabet’s debt is now 11% of equity and Cannae’s is 12%.
Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.
Rest of the best
Honorees not mentioned above are listed in alphabetical order, with their stock symbols and number of appearances.
Abiomed Inc. (ABMD) 2.
Advanced Micro Devices (AMD) 2.
Arista Networks Inc. (ANET) 6.
Cognex Corp. (CGNX) 2.
Epam Systems Inc. (EPAM) 4.
Exelixis Inc. (EXEL) 3
Globus Medical Inc. (GMED) 2.
ICU Medical Inc. (ICUI) 5.
IPG Photonics Corp. (IPGP) 6)
Market Axess Holdings (MKTX) 2.
Masimo Corp. (MASI) 3.
Monolithic Power Systems Inc. (MPWR) 2.
Monster Beverage Co. (MNST) 5.
Old Dominion Freight Line Inc. (ODF) 3.
Power Integrations Inc. (POWI) 2.
RBC Bearings Inc. (ROLL) 4.
Rogers Corp. (ROG) 2.
Simpson Manufacturing Co. (SSD) 4.
Texas Pacific Land Trust (TPL) 2.
Trex Co. (TREX) 2.
Veeva Systems Inc. (VEEV) 4.
Vertex Pharmaceuticals Inc. (VRTX) 3.
Rankings were based on screening software from GuruFocus.com.
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].