Stock investors concerned about whether high debt will burden their equities in a downturn may be wise to look at cash-rich, low-debt companies such as Gilead Sciences Inc. (GILD), KLA-Tencor Corp. (KLAC), Teradyne Inc. (TER) and Gentex Corp. (GNTX). They are well positioned to rise as the economy slows and markets because less liquid, per story in Barron’s, as illustrated by the table below.
The outlook for the U.S. economy remains uncertain even after the Federal Reserve announced on Wednesday that it would hold off on rate hikes for the moment.
4 Stocks With More Cash Than Debt
(Net Cash Per Share)
· Gilead Sciences; $2.73
· KLA-Tencor; $3.54
· Teradyne; $0.30
· Gentex; $1.29
Source: Barron’s; Bloomberg
‘Balance Sheets Will Matter More’
Low-debt stocks have outperformed higher debt rivals by about one percentage point a year for the past 25 years, per Barron’s, which adds up to huge outperformance over the longterm. Lower leveraged companies are also on average less volatile compared to the broader market. In recent years, investors have rewarded riskier strategies as high-debt stocks outperformed by about 10% since 2015. Now, low-debt stocks may start leading again as the economy slows and cash becomes more attractive. “Balance sheets will matter more,” says Tony Scherrer, director of research at Smead Capital Management.
Gilead illustrates this handsomely. The company boasts low debt and $2.73 per share of net free cash. The stock trades at less than 10 times 2019 estimated earnings and yields a solid 3.4%. Citigroup analysts echo the bullish sentiment on Gilead, expecting shares to soar to $106. Analyst Robyn Karnauskas is upbeat on the latest trial of Gilead’s treatment for non-alcoholic steatohepatitis (NASH), a fatty liver disease. Citigroup expects the emerging franchise to lead to sales as high as $4.2 billion, per Barron’s.
While automotive makers have been weighed down by concerns over U.S.-China trade wars, shares of companies that make products for the next generation of autonomous vehicles may be safer bets. Gentex, which has $1.29 of net cash per share, makes products like dimmable glass and biometric authentication. It's shares have risen 6.2% this year, a slight comeback as the stock remains 9.2% lower over 12 months. “We continue to like the Gentex story and believe the company has significant innovation in the pipeline to support future revenue growth,” wrote Baird analyst David Leiker.
It’s important to note that being a cash-rich company with low debt may not be enough to buoy even these stocks during a sustained pullback in the market or an economic downturn. They may only fall less than high-debt stocks. As investors become more selective, these companies also will have to demonstrate they can growth both revenue and earnings.