“Winning isn’t everything. It’s the only thing,” said football coach Vince Lombardi years ago. Many investors feel the same way about earnings.
Excuse me, Lombardi disciples, but earnings aren’t the only thing. To withstand unexpected hardships or to seize timely opportunities, a company’s financial strength is also key.
Once a year in this column, I celebrate financially strong companies with my Balance Sheet Powerhouse list.
To make it, a company must:
- Have a market value of at least $5 billion.
- Carry debt no more than 10% of the company’s net worth.
- Be based in the U.S.
- Have current assets at least twice current liabilities.
- Have earnings of at least 20 cents a share.
I’ve compiled the list from 2001 through 2006, and from 2011 to the present. This year, 49 companies made the roster, the second-highest total ever.
Companies that make the list deserve praise, but their stocks aren’t necessarily buys. In many cases, the company’s excellence is well-known and the stock price is high relative to fundamentals. Each year, however, I find from one to five to recommend.
My Picks
This year, I think five of the Balance Sheet Powerhouse companies deserve consideration as stock buys.
I’ve recommended Cal-Maine Foods Inc. (CALM), the largest U.S. egg producer, in this column several times. This is a risky pick in that the company is riding high now, with egg prices soaring. Still, I think this stock is worth holding through ups and downs. It often has a rich dividend yield.
First Solar Inc. (FSLR) is the largest American company in a field dominated by Chinese companies – the manufacture of solar panels. A trade war between the U.S. and China appears imminent. Tariffs on Chinese panels would presumably help First Solar.
Gentex Corp. (GNTX) makes self-dimming mirrors for cars. The stock sells for only 14 times earnings, a cheap multiple in today’s market. (The overall market multiple is about 24). Gentex has consistently grown its revenue about 7% a year. Earnings jumped 11% last year.
Mueller Industries Inc. (MLI), based in Collierville, Tennessee, makes pipes, rods, tubes, valves, refrigerator coils and a variety of other metal and plastic products. Its return on equity (a measure of profitability) has been above 15% seven years in a row. This is a repeat recommendation from last year.
NEXTracker Inc. (NXT) makes equipment that helps large solar installations follow the sun’s movements across the sky. On Wall Street, 28 analysts follow it, and 22 of them recommend it. That worries me a bit (as the performance record of analysts’ darlings is dubious) but I like the stock nonetheless.
Medal Winners
Whether I recommend them or not, here are a few companies that should be honored for appearing on the Balance Sheet Powerhouse list nine times or more.
Dolby Laboratories Inc. (DLB), which makes audio equipment, has made the Balance Sheet Powerhouse roster 14 times, including nine in a row.
Gentex has done almost as well, gracing the list 13 times.
SEI Investments Co. (SEI) holds third place with 12 mentions on the list. It’s an investment consultant offering services to portfolio managers.
Intuitive Surgical Inc. (ISRG) has made the roster 11 times. A pair of companies – Arista Networks Inc. (ANET) and Cognizant Technology Solutions Corp. (CTSH) have achieved it nine times.
Newcomers
The Balance Sheet Powerhouse list is pleased to welcome a dozen new members this year. They include AAON Inc. (AAON), AppFolio Inc. (APPF), Badger Meter Inc. (BMI), Champion Homes Inc. (SKY), Concept Therapeutics Inc. (CORT), Duolingo Inc. (DUOL), FTI Consulting (FCN), and Hims & Hers Health Inc. (HIMS).
Also making their debut: Maplebear Inc. (CART), NEXTracker Inc. (NXT), Royal Gold Inc. (RGLD) and Synopsis Inc. (SNPS).
The Record
In 20 outings, my Balance Sheet Powerhouse picks have achieved an average one-year return of 14.1%, which compares favorably with the Standard & Poor’s 500 Total Return Index at 10.8%.
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.
My recommendations have been profitable 13 times out of 20, and have beaten the index nine times.
A year ago, I recommended three Balance Sheet Powerhouse stocks: Mueller Industries, T. Rowe Price Group Inc. (TROW) and Alphabet Inc. (GOOGL). Mueller returned 62%, Alphabet 26% and T. Rowe Price 5%. In aggregate, my picks had a 30.9% return, versus 21.6% for the S&P 500. All figures include dividends.
Disclosure: I own Alphabet, Arista Networks, Cal-Maine Foods and Mueller Industries personally and for clients.
Read the full article here