Deep in the heart of The Economist’s recent article on share repurchases was a very interesting statistic — “Two-fifths of S&P 500 firms are spending more than their entire cash-flow on dividends, capital investment and buy-backs, thereby increasing their net debt.”
That fact got me thinking about companies’ debt loads. In particular, I wanted to find the rare companies that are operating with zero debt. To me, these are the companies to be celebrated; these are the great stocks to buy.
I’ve never been a fan of share repurchases; especially when companies pile on debt, albeit at wonderfully low rates of interest, in order to do so. Share repurchases are supposed to be the capital allocation lever of last resort. In recent years they’ve become the first choice.
According to FINVIZ, there are only 23 S&P 500 companies with zero debt. Of that selection, I think three of them are great stocks to buy. Let’s dig into the numbers to find out why.
Great Stocks to Buy — Monster Beverage (MNST)
In August, Monster Beverage (MNST) got into bed with Coca-Cola (KO) in an effort to boost its growth overseas. Coca-Cola will pay $2.15 billion for 16.7% of Monster as part of the deal. The non-cash side of things has Coke transferring its energy drink business to Monster, and in return Monster will give Coke its non-energy drink business which includes sodas, teas, and lemonade.
Coca-Cola made the deal as a way to hedge its bet on the energy drink business. If things work out, KO will likely buy out the rest of Monster at some point in the future. If it doesn’t, Coke caps its energy drink investment at $2 billion plus whatever they’d spent to date developing Full Throttle, etc. That’s a wise use of its capital.
Monster did the deal to gain access to Coca-Cola’s global distribution network. If it wants to compete with Red Bull on an international basis, not just in the U.S., it needs shelf space on every continent. Coke gives it that and more. While it’s unfortunate that Monster was forced into the arms of Big Red, this deal is as win/win as any I’ve seen come down the M&A pike in many years, a big reason why it’s one of my three great stocks to buy.
As great stocks go MNST is one the best. A $10,000 investment in MNST in 2003 is worth $616,000 today; the same $10,000 investment in the S&P 500 is worth just $22,000. The last decade has been very good to Rodney Sacks and Hilton Schlosberg.
But that’s the past.
In its most recent quarterly report, its non-energy drink business generated just 5% of overall revenue and less than 1% of contribution margin, a metric used by Monster to indicate profitability. Clearly its focus is on the energy drinks. These other products now have a home where they will be better supported and quite possibly even thrive. Getting rid of this distraction despite it being a hard choice (non-energy drinks are the original foundation of its business) was the only way to go.
International sales hit 23% in Q2. That doesn’t seem bad until you consider that Red Bull generates almost 70% of its overall revenue outside the U.S. and still manages to outsell Monster on Monster’s own home turf. That’s embarrassing, but totally fixable.
With Coke involved, I could see international sales above 50% within 3-5 years. The only fly in the ointment, something Red Bull and its other competitors also face, is the health-related concerns that keep cropping up. It’s a wildcard for sure, but it’s the only thing keeping MNST stock from another decade of strong returns.
When it comes to great stocks to buy, this is one of the best.
Great Stocks to Buy — Tractor Supply (TSCO)
My second choice of great stocks to buy is especially appropriate at the moment because it’s going through a lull, down 22% year-to-date. I’m talking about Tractor Supply (TSCO), the Tennessee-based retailer that sells everything for the gentleman farmer. Its combination of goods isn’t found in too many places, which keeps Walmart (WMT) and other big-box chains from capturing its market.
Its Q2 report spooked investors for a number of reasons, including very soft same-store sales growth at 1.9% year-over-year — 530 basis points worse than in 2013. TSCO management saw unusual weakness in the first half of the quarter, but the second half was exactly as expected. I’d consider this nothing more than a blip that happens from time to time.
TSCO is one of the most consistent retailers I know. Over the past decade, it has increased revenues every year and operating income in all but one. With more than 1300 stores in 48 states, it has delivered 25 consecutive quarters of comparable transaction count. In other words, traffic’s not letting up, and customers continue to buy more. Sometimes, however, life just gets in the way.
As long as TSCO continues to open 100 or more stores each year, (they aren’t in Canada but that’s another story) and these stores perform as expected, I see no reason why its stock can’t average 20% appreciation every year like it has in the past. The company is that well-run, making TSCO stock a great choice for your portfolio.
Great Stocks to Buy — Chipotle (CMG)
When I think of S&P 500 companies, I immediately think of smokestacks and manufacturing plants. But then I remember companies like Chipotle Mexican Grill (CMG), the fast-casual concept that has taken America by storm. I don’t why, but being able to get a beer and burrito quickly at a moderate price is one of life’s simple joys.
Steve Ells found a concept that resonated with customers, and he ran with it all the way to the end zone. America was built by people with good ideas, and Chipotle definitely is one of them. Sure, it’s just a restaurant, but it’s one that has been giving Yum Brands (YUM) fits ever since McDonald’s (MCD) bought a minority stake in CMG in 1998 when the nascent brand had just 14 stores open after five years in business. By the time McDonald’s spun-off its 90% interest in Chipotle in 2006, CMG had 460 locations scattered across the country. I’m sure not a day goes by when the Golden Arches doesn’t regret cutting CMG loose.
CMG’s second quarter delivered restaurant comps of 17.3%. Revenues grew 28.6% on the strength of its comps and 45 store openings, and net income grew 25.5%. Its comps are accelerating rather than slowing, a great position for any restaurant chain to be in.
At 21 years, old Chipotle it’s just getting going. Don’t fear the $600-plus stock price, because in a couple of years you’ll be worrying about the $1,200 stock price — and so on. When it comes to great stocks to buy with no debt (and almost $800 million in cash), CMG has to be at the top of any list.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.