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John Dorfman
John Dorfman
Articles (192)  | Author's Website |

Five Stocks With High Profitability and Low Debt

Companies that are unusually profitable, has very little debt, and sells for a reasonable price

Let’s imagine that you run a computerized dating service with 1,000 subscribers. You might know that 18% are blonde, 37% are tall, and 10% have an intelligence quotient over 120.

If you have a demanding customer who wants all three of those characteristics, perhaps only six or seven people in your database would do.

It’s much the same with stock screening. Suppose you want to invest in a company that’s unusually profitable, has very little debt, and sells for a reasonable price.

Of the 3,684 U.S. stocks with a market value of $250 million or more, only 394 have a return on stockholders’ equity of 25% or better.

Only 64 of those stocks have debt that doesn’t exceed 10% of stockholders’ equity (corporate net worth).

If you’re fussy about valuations, as I am, you’ll note that only 35 of those stocks sell for 20 times earnings or less.

Today I want to focus on five of those stocks.

Terra Nitrogen

After sojourning above $200 a share during much of 2012-2013, Terra Nitrogen Co. LP (NYSE:TNH) has subsided to about $110 a share. At this price, the fertilizer maker trades for less than 12 times earnings and its dividend of almost $10 a share provides an 8.7% dividend yield.

Whether the dividend can be sustained is a legitimate question; the company is straining to pay it. But in a world with growing population and limited land, fertilizer seems a sound business.

In the past 12 months Terra has earned a 47% return on equity, and it has done that well or better in nine of the past 15 years. The company is debt free.

Francescas Holdings

From headquarters in Houston, Francescas Holdings Corp. (NASDAQ:FRAN) operates more than 600 retail boutiques that sell clothing, jewelry, accessories and gifts. It caters mainly to women 18-35, and tries to give each store a unique feeling rather than a chain atmosphere.

In the past four quarters the company has earned a 31% return on equity, and it has no debt.

Retailing can be a fickle business; it is hard to stay “trend-right,” as the company likes to say. That’s probably why the stock goes for only 12 times earnings, despite its enviable record.

Ituran

Ituran Location and Control Ltd. (NASDAQ:ITRN), based in Israel, makes systems for tracking and recovering stolen cars. Its technology was originally developed by the Israeli armed forces to locate downed pilots. It also makes remote meter-reading equipment.

Ituran sells its systems in Israel, Brazil, Argentina and the United States. The stock fetches about 19 times earnings and six times book value (corporate net worth per share) – more than I personally would pay. But the return on equity is running at nearly 30% and the company is debt-free.

Two Repeats

Two stocks that I recommended in a May column on low-debt companies meet the criteria for today’s column, and I am happy to repeat those recommendations.

Michael Kors Holdings Ltd. (KORS), based in London, designs and sells shoes, accessories and clothing in the U.S., Canada, Europe and Japan. It boasts a return on equity of nearly 40%, and has barely a sliver of debt.

Taro Pharmaceutical Industries Ltd. (TARO), from Israel, makes generic and proprietary drugs. One of its specialties is dermatological ointments but it also makes cardiovascular and neuropsychiatric drugs. With a 32% return on equity, it is debt-free.

Track Record

This is the 12th column I’ve written since 2000 on stocks with high profitability and low debt. Seven of the previous 11 columns have been profitable in the 12 months following publication, and seven have beaten the Standard & Poor’s 500 Index.

The average one-year return on my recommendations in this series has been 12.0%, compared with 6.9% for the Standard & Poor’s 500 Index.

Last year’s list was a dud. Half the stocks were up but a 76.1% loss in NewLink Genetics resulted in a 19.1% loss overall.

Bear in mind that results for my column picks are theoretical and don’t reflect actual trades, trading costs or taxes. The record of my column selections shouldn’t be confused with the performance I achieve for clients. And past performance doesn’t guarantee future results.

Disclosure: My colleague Tom Macpherson owns Terra Nitrogen in the Nintai Charitable Trust, which he manages. I currently have no positions in the stocks discussed in today’s column, personally or for clients.

Correction: In last weeks’ column I incorrectly described the business of Syntel Inc. (SYNT). It is a knowledge processing outsourcing (KPO) company, whose services include programming, systems integration and project management.

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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