It’s bad out there.
Ted Revelle, Chief Investment Officer of TCW Group, which manages nearly $200 billion, is sounding the alarm bells when it comes to corporate debt. The money manager believes the tripling of corporate debt from $2 trillion to $6 trillion since 2008 is about to blow up in investors’ faces.
“Corporate leverage, which has exceeded levels reached before the 2008 financial crisis, is a sign that investors should start preparing for the end of the credit cycle,” Revelle said recently. “The credit-fueled expansion inevitably comes to a bad end. … We’ve lived this story before.”
Central banks around the world are responsible for creating a corporate debt addiction so powerful that companies, large and small, can’t seem to break the habit using cheap money for everything from share buybacks to overpaying on acquisitions. Corporate debt, according to Morgan Stanley data, is now 2.4 times corporate earnings — the highest level since 2000.
Companies might not be able to stop using, but that doesn’t mean you can’t. While it’s not easy to find stocks to buy whose companies are debt-free, they do exist.
Here are seven debt-free stocks to buy in seven different sectors that will survive the coming bear market thanks to their laudable fiscal responsibility.
Debt-Free Stocks to Buy: Dril-Quip (DRQ)
The movie about the 2010 Deepwater Horizon explosion that killed 11 people and injured another 17 comes out at the end of the month. That has to hit home for Houston-based Dril-Quip, Inc. (NYSE:DRQ), which manufactures drilling equipment for offshore oil and gas wells around the world. The company had equipment on Deepwater Horizon but was found to have not played any role in the explosion.
Business, thanks to declining oil prices, hasn’t been great the past 18 months. For the first six months of 2016, revenues declined 30% year-over-year to $309 million; operating earnings followed suit, declining 24% year-over-year to $94.6 million. As a result of poor market conditions, its backlog at the end of June was $460 million — less than half what it was a year ago.
Thankfully, oil prices will eventually recover, and when they do, business will be booming once more. Up until the collapse of oil prices last year, Dril-Quip had five straight years of revenue increases.
What I really like is DRQ’s zero debt and nearly $500 million in cash on the balance sheet. That gives Dril-Quip plenty to tide it over until business improves.
Debt-Free Stocks to Buy: Callaway Golf (ELY)
Sector: Consumer Goods
Yes, I know, the golf industry is dying. Yada, yada, yada. Throw in the bankruptcy of Golfsmith and the decision by Nike Inc (NYSE:NKE) to get out of the golf equipment business, and the game does seem to be on its last legs.
But it’s not.
In fact, if Callaway Golf Co’s (NYSE:ELY) second-quarter and year-to-date numbers are an indicator of the overall health of the game of golf, then things are definitely looking up.
In Q2 2016, ELY saw revenues increase 6.5% to $246 million with an impressive 15% increase in golf ball sales. In terms of profits, gross margins increased 90 basis points to 45%, leading to 36 cents earnings per share — 140% higher than in Q2 2015. For the first six months, revenues were almost flat up 1% to $515 million with earnings per share up 41% year-over-year to 76 cents.
Callaway expects 2016 annual revenues of at least $855 million, gross margins around 44.5%, and earnings per share of at least 40 cents, more than double those in 2015.
Dicks Sporting Goods Inc (NYSE:DKS) will pick up some of Golfsmith’s stores where Callaway is already taking more floor space; the exit of Nike Inc (NYSE:NKE) removes one major competitor from the equation. Anyone who wants to play golf will now be more likely to gravitate to Callaway’s products.
Long-term, these two events are positives, and that will be reflected in future revenues, earnings, and most importantly, growth in its stock price.
Debt-Free Stocks to Buy: SEI Investments (SEIC)
SEI Investments Company (NASDAQ:SEIC) has been providing wealth management solutions to institutional and private client advisers for the past 40 years. Today, it has approximately 8,200 clients and $707 billion in assets under administration and/or management.
You could have bought SEIC stock in the low $30s back in February. It has since had a substantial rebound, though it’s still down about 11% year-to-date through Sept. 21.
If you’re looking for an asset management business that’s super aggressive, SEI isn’t the stock for you. Buying SEIC stock gives you the ability to sleep at night. It generates more than $300 million in free cash flow from annual revenues of $1.3 billion. From that free cash flow, it’s able to easily pay a dividend that currently yields 1.1%.
Conservative investors will love this stock. No debt, a decent dividend and good long-term performance, up 26% on an annualized basis over the past five years.
Boring … but in a good way.
Debt-Free Stocks to Buy: Globus Medical (GMED)
If you’ve got spine problems that required surgery, there’s a distinct possibility one of Globus Medical Inc’s (NYSE:GMED) products is sitting inside you. That’s because Globus is a leading manufacturer of musculoskeletal implants. It’s not a glamorous business, but it continues to grow — and with an aging population, that growth isn’t likely to change anytime soon.
In the first six months of the year ended June 30, Globus generated $80.8 million in operating earnings from $276.8 million in revenue. Operating earnings and revenues increased 6.9% and 4.4% year-over-year, respectively. GMED expects $575 million in revenue in fiscal 2016, which includes about $10 million from its $80 million acquisition in July of the international operations of medical device manufacturer Alphatec Holdings Inc (NASDAQ:ATEC). On the bottom line, non-GAAP earnings per share will be $1.20. In 2017 it expects revenues of $640 million.
Steady as she goes.
My favorite part of the press release for its second-quarter earnings report were the words, “The company remains debt free.” With $310 million in cash and cash equivalents as well as marketable securities — after taking into account the $80 for the Alphatec acquisition — it’s downright flush.
Shares are on discount thanks to a 20% beating, so now is a good time to get on board.
Debt-Free Stocks to Buy: Williams-Sonoma (WSM)
Sector: Consumer Services
Specialty retailer Williams-Sonoma, Inc. (NYSE:WSM) had a great run between 2009 and 2014, delivering six straight years of gains for shareholders before hitting the skids in 2015. The company that could do no wrong both online and in the stores was suddenly experiencing a business slowdown, and investors predictably took their money and went home.
As a result, WSM stock has declined 44% since hitting its all-time high of $89.38 in August 2015. The last time it traded at these levels was early 2013.
Yes, same-store sales have essentially disappeared — the company registered just 0.6% growth in Q2 2016 — but there’s still a lot to love about Williams-Sonoma.
Most importantly, it has no long-term obligations other than its store leases. It’s debt-free with $111 million in cash in the bank.
West Elm, its fastest-growing brand, saw same-store sales grow 15.8% in Q2 2016. At the end of fiscal 2015, West Elm had $821 million in revenues. Growing revenues by 20%-plus annually, WSM expects its annual revenues to hit $2 billion within the next five years.
Another big opportunity exists outside the U.S. Currently, its global revenues account for just 6% of its total sales. That should be much higher. In the coming years, look for Williams-Sonoma to focus more on its business outside America.
Lastly, WSM has the perfect balance, with online and bricks-and-mortar revenue split evenly down the middle. Most retailers would kill for that.
Williams-Sonoma yields almost 3% and trades for less than 13 times cash flow. WSM stock definitely is worth owning.
Debt-Free Stocks to Buy: Cray (CRAY)
Cray, Inc. (NASDAQ:CRAY) makes supercomputers and the software and data storage that goes along with these high-performance machines.
Business has been great over the past four years, with revenues growing from $156 million in 2011 to $601 million this past year. With that growth came increased profits. In 2011, Cray had operating profits of $1 million. In 2015, they were $41 million.
As a result of its success, CRAY stock achieved an annualized total return over the past five years of 35.4%, more than double the S&P 500.
Then came a whole slew of problems that completely derailed the stock, including an electrical smoke incident at one of its plants that seriously delayed the delivery of five systems later in the year.
Long-time shareholders know this is a volatile stock. But to see CRAY decline by 27% in August alone is hard to take for anyone. If you buy this stock, be prepared for a whole lot of angst.
When Cray announced its first-quarter results on May 3, it provided revenue guidance for the year of $825 million. By the time it announced its second-quarter results Aug. 2, revenue projections were down to $650 million, a 20% decline in just three months.
The upside is that the company still expects to make money in 2016, revenues will be slightly higher than in 2015, and it has no long-term debt and $224 million in cash and short-term investments to cushion the blow.
Of the seven stocks mentioned in this article, CRAY presents the biggest risks. Ultimately, I believe shareholders will be rewarded, but first, it has to prove it can grow both the top and bottom lines — something it hasn’t done so far in 2016.
Debt-Free Stocks to Buy: Energy Recovery (ERII)
Energy Recovery, Inc. (NASDAQ:ERII) is up more than 560% over the past 52 weeks and roughly 130% year-to-date. Yet its market cap is still less than $1 billion.
But maybe not for long.
Its CEO, Joel Gay, is No. 13 on Fortune Magazine’s 2016 Top 40 Under 40 list. He’s also one of the youngest black CEOs of a public company.
While those are nice accolades, investors care more about the business and bottom line, but that’s OK — Energy Recovery shines there, too.
If you’ve never heard of the company, it helps frackers and other businesses with high rates of fluid flows, protect their equipment against the harmful nature of these fluid flows while also converting the pressure energy created from these fluid flows into a reusable asset. Hence the name Energy Recovery. And by doing so, it saves its clients $1.7 billion annually. Oil and gas producers can save between $4 to $5 per barrel from ERII’s Vorteq hydraulic pumping system.
They say the best businesses either make or save people or businesses money. Energy Recovery has definitely figured that out.
Still very small in terms of revenues — $22.0 million for the first six months of 2016 — ERII has managed to significantly improve its bottom line in 2016. In the first six months of fiscal 2015, Energy Recovery lost $11.6 million. This year, it has whittled that down to $1.5 million.
With a mere $33,000 in long-term debt and a bright future, I’ve made an exception to the debt-free requirement. After all, it might as well have no debt.
I’m not an engineer, but ERII has success written all over it.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.