Why did companies such as Goldman Sachs and General Electric come running to Warren Buffett during the financial crisis?
Because he had something they lacked--cash.
Financial strength is something most investors don&a;rsquo;t pay enough attention to. To celebrate companies with outstanding financial strength, I compile an annual list of Balance Sheet Powerhouses.
To make the list, a company must pass six tests:
&l;/p&g;&l;ul&g;&l;li&g;Domiciled and traded in the U.S.&l;/li&g; &l;li&g;Market value of $1 billion or more.&l;/li&g; &l;li&g;$300 million or more in cash and near-cash.&l;/li&g; &l;li&g;Debt less than 10% of stockholders&a;rsquo; equity.&l;/li&g; &l;li&g;Current ratio (current assets divided by current liabilities) of 2.0 or better.&l;/li&g; &l;li&g;Earnings of at least 10 cents a share in the latest fiscal year.&l;/li&g; &l;/ul&g;&l;strong&g;The Leaders&l;/strong&g;
Thirty-three companies pass these tests as of February 8, up from 28 companies a year ago. Leading the parade are &l;strong&g;Alphabet&l;/strong&g; (GOOGL) and &l;strong&g;Facebook&l;/strong&g; (FB). Alphabet has more than $16 billion in cash, Facebook $10 billion.
No one else comes close to those two behemoths, but five other companies have more than $1 billion in cash and near-cash.
They are &l;strong&g;Vertex Pharmaceuticals&l;/strong&g; (VRTX) with $3.2 billion, &l;strong&g;Regeneron Pharmaceuticals&l;/strong&g; (REGN) with $1.5 billion, &l;strong&g;Madison Square Garden&l;/strong&g; (MSG) with $1.2 billion, &l;strong&g;Cognizant Technology&l;/strong&g; &l;strong&g;Solutions&l;/strong&g; (CTSH) with $1.2 billion and &l;strong&g;Skyworks Solutions&l;/strong&g; (SWKS) with $1.1 billion.
To make the Balance Sheet Powerhouses list is an honor and a tribute to a company&a;rsquo;s success. It is not necessarily a stock recommendation. The virtues of many of these companies are well known, and so their stocks are often high-priced.
&l;strong&g;My Picks&l;/strong&g;
Each year, I pick just a few Balance Sheet Powerhouse stocks to recommend. This year I plump for three: &l;strong&g;Advanced Energy Industries&l;/strong&g; (AEIS), &l;strong&g;Foot Locker&l;/strong&g; (FL), and &l;strong&g;Urban Outfitters&l;/strong&g; (URBN).
Advanced Energy makes power conversion equipment. It is on this honor roll for the second straight year. Analysts expect its earnings to dip this year, and recover in 2020. The stock sells for 12 times earnings, a modest multiple these days. The company has $351 million in cash or near-cash, and no debt.
Foot Locker sells shoes and athletic wear. The stock sells for only 13 times earnings because of internet competition and the fickle nature of apparel retailing. Earnings dropped last year but the company has $849 million in cash or near-cash, and only $125 million in debt.
Urban Outfitters sells clothes, mainly to young adults. As brick and mortar retailers have fallen out of favor, the stock has meandered around, currently selling for about the same price ($31 a share) as it did nine years ago. The company is decently profitable, has $329 million in cash, and has no long-term debt.
&l;strong&g;Repeat Winners&l;/strong&g;
Three companies--Alphabet, &l;strong&g;AVX&l;/strong&g;&a;nbsp; (AVX) and &l;strong&g;Dolby Laboratories&l;/strong&g; (DLB) are making their eighth appearance on this honor roll. They are the current champions for longevity.
&l;strong&g;Cognizant Technology Solutions&l;/strong&g; (CTSH) enjoys its seventh year on the list.
Back for a sixth time are &l;strong&g;Intuitive Surgical&l;/strong&g; (ISRG), &l;strong&g;SEI Investments&l;/strong&g; Co. (SEI) and &l;strong&g;Skyworks Solutions&l;/strong&g; (SWKS).
&l;strong&g;The Rest&l;/strong&g;
For those who want the full Balance Sheet Powerhouse list, here are the companies not otherwise mentioned in this article:
&l;strong&g;Ansys&l;/strong&g; (ANSS), &l;strong&g;Arista Networks&l;/strong&g; (ANET), &l;strong&g;Axon Enterprise&l;/strong&g; Inc. (AAXN), &l;strong&g;Bio-Rad Laboratories&l;/strong&g; (BIO), &l;strong&g;Cerner&l;/strong&g; (CERN), &l;strong&g;Columbia Sportswear Co&l;/strong&g;. (COLM), &l;strong&g;Deckers Outdoor&l;/strong&g; (DECK).
Also: &l;strong&g;Emergent BioSolutions&l;/strong&g; (BIO), &l;strong&g;Epam Sysems&l;/strong&g; (EPAM), &l;strong&g;Exelixis&l;/strong&g; (EXEL), &l;strong&g;ICU Medical&l;/strong&g; (ICUI), &l;strong&g;IPG Photonics&l;/strong&g; (IPGP), &l;strong&g;Masimo&l;/strong&g; (MASI), &l;strong&g;Monster Beverage&l;/strong&g; (MNST), &l;strong&g;Skechers USA&l;/strong&g; (SKX), &l;strong&g;TripAdvisor&l;/strong&g; (TRIP), &l;strong&g;United Therapeutics&l;/strong&g; (UTHR), V&l;strong&g;eeva Systems&l;/strong&g; (VEEV) and &l;strong&g;Yelp&l;/strong&g; (YELP).
&l;strong&g;Past Record
&l;/strong&g;Beginning in 2001, I&a;rsquo;ve written 15 columns on Balance Sheet Powerhouses, including this one. The average one-year total return on my recommendations from the previous 14 columns has been 14.0%, compared to 8.5% for the Standard &a;amp; Poor&a;rsquo;s 500 Index.
So far so good, but my success was concentrated in a handful of good years. I beat the S&a;amp;P 500 only six times out of 14 in this series.
Last year&a;rsquo;s picks produced a 6.5% loss, from February 13, 2018 through February 8, 2019. Advanced Energy Industries (AEIS), Gentex (GNTX), Sanderson Farms (SAFM) and Skyworks Solutions (SWKS) all declined. My only gainer was Foot Locker. The S&a;amp;P 500 advanced 3.7%
Bear in mind that my column recommendations are theoretical and don&a;rsquo;t reflect actual trades, trading costs or taxes. Their results shouldn&a;rsquo;t be confused with the performance of portfolios I manage for clients. And past performance doesn&a;rsquo;t predict future results.
&l;em&g;Get timely investing news and information from Forbes Investing Digest. &l;a href=&q;http://info.forbes.com/Investing-Digest-FDC-Sign-Up.html?k=EM_ID_FDC&q; target=&q;_blank&q;&g;Sign up now, it&s;s free.&l;/a&g;&l;/em&g;
&l;em&g;Disclosure: I own Alphabet and Sanderson Farms personally and for many of my clients.&l;/em&g;
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&l;em&g;John Dorfman is chairman of Dorfman Value Investments LLC and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at &l;a href=&q;mailto:jdorfman@dorfmanvalue.com&q; target=&q;_blank&q;&g;jdorfman@dorfmanvalue.com&l;/a&g;. &l;/em&g;
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