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31 stocks picked for strength

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Monday, Feb. 10, 2014, 11:18 p.m.
 

Qualcomm Inc. (QCOM), a pioneer in mobile-phone technology, has been named a Balance Sheet Powerhouse for the ninth time in my annual assessment of companies' financial strength. That ties the record, set in 2013 by Forest Laboratories Inc. (FRX), which missed the cut this year.

AVX Corp. (AVX) of Fountain Inn, S.C., a maker of electronic components, is back on the honor roll for a sixth time. Dolby Laboratories Inc. (DLB) is saluted for a fifth time.

Twenty-eight other companies make my Balance Sheet Powerhouses list. All 31 winners are listed near the end of this column.

A balance sheet is a corporate net worth statement. It lists all of a company's assets and liabilities. The amount by which assets exceed liabilities is called stockholders' equity or book value.

This year, I modified the Balance Sheet Powerhouse criteria, but only slightly. To make the roster, a company must:

•Have a stock-market value of $1 billion or more.

•Have at least $300 million in cash or near-cash.

•Have long-term debt less than $200 million.

•Have total debt less than 5 percent of total capital.

•Have earnings of at least 10 cents a share in the most recent four quarters.

•Have a quick ratio (current liquid assets divided by current liabilities) of 3.0 or better.

Look back

I have compiled this list annually from 2001 to 2006, and again from 2011 to the present. In the 10 years covered in the series, I have handed out 272 commendations to 141 companies. But while the companies deserve kudos, that doesn't mean I recommend buying their stocks.

This year, for example, I recommend purchase of stock in only three of the 31 honored companies. During 10 years, I have recommended 26 of the stocks.

Why do I recommend so few, when the companies are obviously excellent? It is because their excellence is no secret, and therefore many of these stocks sell for 20 to 30 times earnings, sometimes even more.

The average 12-month gain on my recommendations in this series has been 22.6 percent, including a 27.9 percent gain on the three stocks I selected a year ago. Activision Blizzard Inc. was up 44.9 percent; Dolby Laboratories, up 29.9 percent; and Bed Bath & Beyond Inc., 8.8 percent. All figures are total returns including dividends.

For comparison, in the same 10 years, the Standard & Poor's 500 Index has averaged a 7.5 percent return. In the latest year (Feb. 12, 2013, through February 7, 2014, to be exact), it returned 20.7 percent.

Bear in mind that the performance figures for my column recommendations are theoretical and don't reflect trading costs or taxes. Past performance doesn't predict future results. And the results of my column picks should never be confused with figures for portfolios I run for clients.

Honor roll

Here is the full list of Balance Sheet Powerhouses as of early 2014. To conserve space, I omit full corporate names.

Nine-time winner: Qualcomm (QCOM).

Six-time winner: AVX (AVX).

Five-time winner: Dolby Laboratories (DLB).

Four-time winner: Cognizant Technology (CTSH).

Three-time winners: MKS Instruments (MKSI), Skyworks Solutions (SWKS), SEI Investments (SEIC), and Intuitive Surgical (ISRG).

Two-time winners: Akamai Technologies (AKAM), Alexion Pharmaceuticals (ALXN), Cree (CREE), and Nvidia (NVDA).

First-time winners: Avago Technologies (AVGO), Chipotle Mexican Grill (CMG), Convergys (CVG), Inter Parfums (IPAR), International Rectifier (IRF), IPG Photonics (IPGP), LinkedIn (LNKD), Lululemon Athletica (LULU).

Also: Marvell Technology (MRVL), Mellanex Technologies (MLNX), Michael Kors Holdings (KORS), Myriad Genetics (MYGN), Plantronics (PLT), QLogic (QLGC), Synaptics (SYNA), T. Rowe Price Group (TROW), Techne (TECH), Tessera Technologies (TSRA), and Zebra Technologies (ZBRA).

Forest Labs, which had made every previous list, missed this year because its quick ratio was a little below 3.0.

Microsoft Corp., which made the list six times in the past, didn't make it this year as its debt is too high.

Surprisingly, Apple Inc. (AAPL), famous for its giant cash holding, didn't make the cut either. It exceeds the cash requirement many times over, but has about $17 billion in debt, which amounts to 13 percent of equity.

Recommendations

This year I like Inter Parfums Inc. (IPAR), a New York company that makes perfume under licensing agreements with prestigious brands, such as Burberry, Van Kleef & Arpels, Dunhill and Karl Lagerfeld.

I see merit in QLogic Corp. The Alisa Vieja, Calif., company makes components for servers and networking equipment.

Finally, I favor six-time winner AVX, which looks inexpensive when you compare the stock price with per-share sales or with book value. The majority of the stock is owned by Kyocera Corp. of Kyoto, Japan.

I caution against buying stock in LinkedIn Corp. (LNKD). Though the website is popular for business networking, the stock seems to me ridiculously expensive at 911 times earnings and 19 times revenue.

John Dorfman is chairman of Thunderstorm Capital in Boston and a syndicated columnist. He can be reached at jdorfman@thunderstormcapital.com.

 

 
 


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