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Balance sheet bodes well for trio

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Tuesday, Feb. 12, 2013, 12:01 a.m.
 

Take a bow, Yahoo! Inc. Step up to the podium, Cognizant Technology Solutions Corp. Looking good, Ralph Lauren Corp.

These companies and 20 others are on my roster of Balance Sheet Powerhouses for 2013.

I compile this list annually to honor companies with unusually strong balance sheets and to counter what I consider investors' monomania about earnings. Many investors care only whether earnings are growing and whether earnings beat expectations.

Those things are important, but they are far from the whole ball game in investing. One factor that many investors neglect is balance-sheet strength.

To make my honors list as a Balance Sheet Powerhouse, a company must have a market value of $1 billion or more; cash or near-cash of $300 million or more; long-term debt of $200 million or less; total debt no more than 10 percent of stockholders' equity; a current ratio (current assets divided by current liabilities) of 1.0 or more; and fully diluted earnings of at least 10 cents a share in the latest fiscal year.

I have compiled the Balance Sheet Powerhouse list nine times, in 2000 through 2006, and from 2011 to the present. This year 24 companies made the cut — the shortest list since 2003. One company, Forest Laboratories Inc., has made the list all nine times.

Here is the roster of repeat winners and newcomers among the 24 companies that qualified this year.

• Nine-time winner: Forest Laboratories Inc. (FRX).

• Eight-time winner: Qualcomm Inc. (QCOM).

• Six-time winner: Gentex Corp. (GNTX).

• Five-time winner: Bed Bath & Beyond Inc. (BBBY).

• Four-time winners: American Eagle Outfitters Inc. (AEO), Dolby Laboratories Inc. (DLB).

• Three-time winners: Activision Blizzard Inc. (ATVI), Cognizant Technology Solutions Corp. (CTSH), Expeditors International of Washington Inc. (EXPD), Micros Systems Inc. (MCRS).

• Two-time winners: Amdocs Ltd. (DOX), Hittite Microwave Corp. (HITT), Intuitive Surgical Inc. (ISRG), LSI Corp. (LSI), MKS Instruments Inc. (MKSI), SEI Investments Co. (SEIC), Skyworks Solutions Inc. (SWKS).

• First-time winners: Align Technology Inc. (ALGN), CommVault Systems Inc. (CVLT), Entegris Inc. (ENTG), Progress Software Corp. (PRGS), Ralph Lauren Corp. (RL), Ultratech Inc. (UTEK), Yahoo! Inc. (YHOO).

Microsoft Corp. (MSFT), which had been honored six times, didn't make the cut this year because its debt-to-equity ratio has risen above 10 percent.

Because the Balance Sheet Powerhouses are obviously excellent companies, they are often priced out of the value range I prefer. In other words, they are all good companies, but only some are good stocks to buy.

Each year, I have recommended from one to four of the Powerhouse stocks as ones that I think can be bought for their capital-appreciation potential.

Last year I selected three: Forest Laboratories, Activision Blizzard and MKS Instruments. From Feb 21, 2012, through Feb. 8, 2013, Forest Labs rose 11 percent (including dividends), Activision returned 13.2 percent, and MKS lost 9 percent.

All three of my selections performed worse than the Standard & Poor's 500 Index, which returned 13.9 percent. The average return for my picks was 5.03 percent.

Long-term, the results are better. In eight years, my recommendations in this series have produced an average one-year return of 21.9 percent, versus 5.9 percent for the S&P 500.

It should be emphasized that these are paper returns, with no allowance for trading costs or taxes. Results of column recommendations shouldn't be confused with those for portfolios I run for clients. And past performance doesn't predict future results.

Also, while the average returns were good, that was in large part because of a few big winners. Only four of my eight sets of recommendations beat the S&P 500, and only five of the eight were profitable.

This year I will again recommend three of the Powerhouse stocks. One is a repeat – Activision Blizzard. The Santa Monica, Calif., video game company is debt-free and its stock sells for 13 times earnings.

I also like five-time winner Bed Bath & Beyond of Union, N.J. I think this retailer of sheets, towels and other home goods could benefit from a pretty good year for consumer spending.

This stock sells for 14 times earnings.

Finally, I like Dolby Laboratories Inc. of San Francisco, whose audio equipment is used by both amateurs and professionals such as movie studios and recording studios. Shares in this debt-free company go for 14 times earnings.

The other 21 companies on this year's list sell for 15 to 203 times earnings.

They all richly deserve recognition – but you won't find a cheapskate investor like me paying up for them.

John Dorfman is chairman of Thunderstorm Capital in Boston and a syndicated columnist; jdorfman@thunderstormcapital.com.

 

 
 


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