The other day I saw an article in Forbes by value investor John Dorfman that examined four stocks to buy with little debt and high profitability.
Of Dorfman’s four picks, I’m familiar with three of them. Cactus is the outlier of the group. It turns out the company makes wellheads and flow control products for the energy industry.
You learn something new every day in this business.
Anyway, I’m always on the lookout for a good story idea, so I thought I’d run with Dorfman’s theme and come up with seven S&P 500 stocks to buy that have little debt and lots of profits.
To qualify, a company must have a debt-to-equity ratio of 20% or less and a return on equity 15% or higher.
S&P 500 Stocks to Buy: Monster Beverage (MNST)
After conquering the energy drinks field, Monster is looking to capture a big chunk of the cannabis- and alcoholic-beverage markets.
According to the Wall Street Journal, Monster is said to be interested in rolling out hard seltzers, malt beverages, and cannabis beverages once its non-compete (it’s precluded from producing non-energy drinks) clause with Coca-Cola (NYSE:KO) ends in 2020.
“This move actually makes a lot of sense for the company because Coke is looking more and more like a threat. In April, the brand debuted Coca-Cola Energy in Spain and Hungary, and it already sounds healthier than Monster,” Delish reported June 12.
Nobody thought Monster would rule the energy drink business, but here it is. I wouldn’t bet against CEO and co-founder Rodney Sacks. He knows a thing or two about winning in the beverage biz.
Foot Locker (FL)
Foot Locker (NYSE:FL), has gotten hammered in the past month, down approximately 25%. Nonetheless, the global retailer of sneakers has a remarkably strong balance sheet with $123 million in long-term debt, cash and cash equivalents of $1.1 billion and a return on equity of 26.9%.
How do you lose 25% in a single month?
Well, in Foot Locker’s case, it missed analysts’ first-quarter earnings estimate by eight cents. That’s right, the consensus was $1.61, and FL came in at $1.53. On the top line, analysts were expecting sales of $2.11 billion; Foot Locker delivered revenues that were $33 million lower than expected.
Hardly a bad earnings result — comps rose by 4.6% during the quarter, suggesting to me that the long-term goals it has in place will surely be met.
In the meantime, FL stock gives you a dividend yield of 3.7% and trading at 8.1 times its forward earnings.
Can you say value stock? I knew you could.
Hormel Foods (HRL)
It’s only appropriate that a pescetarian such as myself recommend a stock like Hormel Foods (NYSE:HRL), the makers of Spam, the most disgusting meat-based product ever created.
As I said, Spam is a horrible product, but a particular segment of the population seems to love it, and it pays the bills.
In the first six months of 2019, Hormel’s total segment profit was $615.4 million on $4.7 billion in sales, an operating profit of 13.1%.
The meat-based food company is slowly making its way into plant-based foods such as a vegan pizza topping to meet the needs of consumers. While not at the front of the pack, it’s working hard behind the scenes to deliver for its customers.
“We understand that it is a shiny new toy,” CEO Jim Snee said at a food conference in Paris recently. “We get that. It is one of our shiny new toys as well. It is something that is certainly on our minds like it is everyone else, and there is a lot of work happening both in the market and behind the scenes.”
Perhaps there is life after Spam.
SVB Financial (SIVB)
The holding company of Silicon Valley Bank has long-term debt of just $696.7 million, cash and cash equivalents of $7.1 billion, $28.9 billion in loans outstanding and a return on equity of 22.1%, which is over 800 basis points higher than JPMorgan (NYSE:JPM).
In January, SIVB paid up to $340 million for Boston-based Leerink Partners LLC, an investment bank specializing in the healthcare industry. With all the changes happening in healthcare, owning a business that understands healthcare and life sciences companies, will continue to demonstrate why its a bank built on innovation.
Whenever it drops below $200 over the next few years, investors should buy SIVB stock. You won’t regret it.
Intuitive Surgical (ISRG)
Source: Jon Fingas via Flickr (Modified)
In February of this year, Intuitive Surgical (NASDAQ:ISRG), the makers of the da Vinci surgical system, got the green light from the FDA for Ion by Intuitive, a flexible robotic catheter that helps physicians reach “nodules in any airway segment within the lung.”
If you’ve owned ISRG stock, you’re likely delighted by the news because it takes this goose beyond its golden egg. While I don’t believe Intuitive is anywhere near the saturation point for its da Vinci surgical system, Ion shows it’s also not a one-trick pony.
That said, being a one-trick pony has made long-term shareholders very wealthy. CEO Gary Guthart owns 701,824 shares of ISRG that are worth a cool $374 million. That could buy a bunch of its surgical systems.
ISRG stock hasn’t done much so far in 2019, up just 13.2% year to date, but that’s okay.
It’s got a great balance sheet with no debt, cash and marketable securities of $2.8 billion, and a return on equity of 17.9%.
Long-term, I don’t think you can go wrong with ISRG.
A.O. Smith (AOS)
The last three years have not been kind to A.O. Smith (NYSE:AOS), the Wisconsin-based maker of water heaters, boilers and water treatment and filtration systems for both commercial and residential use.
I first became interested in the company in 2012 because of its tankless water heaters. It has been so long that I can’t remember exactly why I was interested in tankless water heaters. As I got to know the business, I couldn’t help but recommend its stock.
In recent years, AOS has significantly underperformed the S&P 500, which is unusual for a company that has delivered an annualized total return of 16.5% over the past 15 years.
Unfortunately, to make matters worse, J Capital Research, a short seller intent on driving down AOS stock, made allegations against the company about its Chinese operations that suggested it was inflating sales and profits in China. The company flatly denies the allegations.
All I can say is that I’ve followed the company’s progress over the past seven years and I’m going to believe it’s worth standing behind this business until proven otherwise.
Ulta Beauty (ULTA)
Source: Mike Mozart via Flickr
For almost two years, I wondered when Ulta Beauty (NASDAQ:ULTA) was going to expand to Canada.
“For me, the fact that the company hasn’t touched the surface when it comes to international expansion like Canada says the company’s growth story is very much intact despite the headwinds it might face,” I wrote on August 23, 2017.
Well, the beauty retailer finally announced May 30 that it was coming to Canada, after studying various countries to figure out where it would launch its international expansion.
“International expansion represents an attractive and incremental long-term growth platform, which extends our core capabilities and leverages our value proposition,” CEO Mary Dillon said on Ulta’s Q1 2019 conference call. “We believe that the Ulta Beauty value proposition is very relevant and differentiated in multiple geographies around the globe and Canada is an attractive and logical place to start.”
Dillon is one of the best retail executives in the U.S. I’m sure she will do what’s best for shareholders and figure out the right pace for opening stores in Canada. Although Sephora and Shoppers Drug Mart provide competition, Ulta’s in-store experience combined with top-notch online sales provides a loyal customer base that spends more.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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