Think back to the financial crisis and the stocks that didn’t make it. Maybe they took on too much leverage with low-quality loans. Perhaps they invested heavily near the peak of their respective cycles, such as with low-quality oil companies. Either way, poorly managed companies didn’t make it out alive. Further, not only did the stocks with the strongest balance sheets survive, but they were the first to thrive when the economy improved.
While many investors may think of companies with high-quality balance sheets as boring investments, look at it on a more personal level. While often times investors are only in a name for the short term, think of long-term investments differently. Would you invest in the local pizza joint that shuts down and changes owners every 12 to 18 months, or the one that has been up and running for 40 years straight? Which do you think will best weather an economic slowdown?
If you had to ask one of two friends to hold onto $1,000 for you, would you choose the one who continually changes jobs and has been evicted twice, or the one who has been in the same house for a decade with steady employment?
These companies are stewards of your money. Don’t give it to the unscrupulous ones. We may not head into a recession in the next year, but that doesn’t matter. We still don’t want our funds tied up lousy companies, even if it’s simply a period of higher volatility. We want the best.
With that said, here’s a look at a few of the best stocks with the strongest balance sheets.
Leading off the list are a pair of FANG stocks, starting with Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG). When investors think of Alphabet, they think of its great assets. Things like YouTube.com and Google.com, along with its Waymo, cloud and advertising divisions. They also think of the company’s great growth prospects, with analysts forecasting revenue growth of 23% this year and 19% next year.
They may even make the argument that Alphabet is a cheap stock, or at least a reasonably priced one. GOOGL stock currently trades at 23 times forward estimates, which call for $41.75 per share. That’s up almost 30% from fiscal 2017.
But rarely do people think of Alphabet for its balance sheet power. While this giant has made some large acquisitions in the past, it has done a good job of padding its bottom line and avoiding debt. Alphabet has more than $106 billion in cash and short-term investments and total long-term debt of just $3.9 billion.
In other words, GOOGL could pay that amount off in a snap and still have more than $100 billion locked away in its vault. The figure is notable given Alphabet’s $750 billion market cap.
Generating more than $21 billion in free cash flow over the last twelve months and with operating margins of roughly 20%, Alphabet has a robust and profitable business. Its balance sheet is a rock and investors should feel comfortable paying a premium for this blue-chip tech investment.
The other FANG stock on the list is Facebook (NASDAQ:FB). This isn’t a stock many investors are willing to pay a premium for right now, even though like Alphabet it has premium online and mobile properties. The Facebook and Instagram platforms are two of the most popular social media outlets in the world.
That leads to big-time advertising dollars and because of its business, it leads to massive margins. Facebook has gross margins north of 80% — what?! — and profit margins of 37.5%. To put that in perspective, GOOGL has profit margins of just under 15% and it’s considered an incredible company.
I’ll readily admit that Google has a deeper moat than Facebook, but we can’t ignore the latter’s grip on social media or its profitability. This leads to robust demand for online advertising, a high-margin engine that funnels cash to the bottom line.
In all, Facebook holds more than $41 billion in cash and short-term investments and no debt whatsoever. While that’s significantly less cash than GOOGL, keep in mind that FB stock has a market cap of “just” $440 million.
Further, keep in mind that over the last 12 months, FB stock has generated roughly $17.5 billion in free-cash flow. Facebook essentially generates far more cash than it needs to in a given quarter. Ultimately, that allows the company to invest in multiple initiatives, both on offense and defense. For that reason, (and three others) some will consider FB stock a buy.
Shifting gears away from FANG, our next stock is PayPal (NASDAQ:PYPL). This stock doesn’t have the lower valuation that Alphabet and Facebook sport, but that’s about the only knock on the company.
With its PayPal and Venmo platform, this company continues to churn out strong revenue and earnings growth. Estimates call for 18% revenue growth this year and 17% next year. For earnings, estimates call for 26% growth and 20% growth during the same periods, respectively. Furthermore, free cash flow remains robust.
On the balance sheet front, PayPal’s sitting on $9.5 billion in cash and short-term investments and zero long-term debt. The company has $247 million in accounts payable and over $2.5 billion in net receivables.
The cash horde may not be that of Alphabet’s, but it’s still notable for a $100 billion company. While growth will likely take a hit during an economic slowdown, know that PYPL has staying power when it comes to its financials.
Monster Beverage (MNST)
Many consider Monster Beverage (NASDAQ:MNST) to be a takeover target, particularly by a larger beverage rival looking for more growth and to fill a niche role in its product portfolio. Of course, Coca-Cola (NYSE:KO) makes sense, given that the two have worked together for quite some time and KO has a 16.7% stake in Monster.
Still, we don’t know if a deal will ever come. After all, it hasn’t yet. But in the meantime, we can relish in the fact that Monster has a strong balance sheet.
Although $1.8 billion in cash isn’t the largest sum, the company has no long-term debt despite its rapid expansion plans. Accounts receivable are more than double the size of its accounts payable, while its $2.1 billion in current assets dwarfs current liabilities of $656 million.
Monster is generating almost $1 billion in free cash flow per year now, making this a lucrative prospect. Remember, we don’t need to have $100 billion in cash to be a strong financial company. Monster has no debt, plenty of money and generates a ton of cash from its operations. That’s something investors need to look at.
Skyworks Solutions (SWKS)
I’m not sure why Skyworks Solutions (NASDAQ:SWKS) doesn’t get more love. Since it’s down about 40% from its highs, perhaps SWKS stock isn’t the one to seek shelter in amid a downturn. But if you can pick this name up on the cheap or ride out the storm, it’s worth considering.
First, the balance sheet. With $1.03 billion in cash and short-term investments, this $12 billion company is sitting pretty — particularly given that it has no long- or short-term debt. In fact, current assets total $2.26 billion to just $390 million in current liabilities. That’s a great ratio!
Total assets vs. total liabilities is also great, at $4.8 billion vs. $732 million.
While we’re dealing with smaller numbers than with GOOGL, understand that for its size, these are great measures for SWKS. To make matters more attractive, this company generated over $800 million in free cash flow over the last year. While down from the $1 billion it did the year prior, this is still a notable amount for a company of this size.
Although estimates call for modest earnings and revenue growth this year, next year is set for a big improvement. Expectations call for 11% earnings growth alongside 8% sales growth. As for valuation, SWKS stock trades at just 14 times this year’s earnings. It also yields 2.2%.
Three years ago, Regeneron (NASDAQ:REGN) generated just over $400 million in free cash flow. In 2018, that figure has swelled to more than $1 billion. And while REGN stock has seen its share of price swoons, investors should take a closer look at this biotech giant.
Sporting a $41 billion market cap, REGN stock trades at a reasonable 17 times forward earnings, given that estimates call for revenue to grow by around 10% this year and next. While earnings growth of 32% this year falls off to just 4.5% next year, this one warrants a closer look.
With “just” $4.5 billion in cash and short-term investments, REGN doesn’t jump out as an overwhelmingly strong balance sheet candidate. However, current assets of $5.7 billion and total assets of $10.8 billion dwarf the company’s current liabilities and total liabilities of $1.4 billion and $2.9 billion, respectively.
While REGN does carry $700 million in long-term debt, it generates terrific cash flow. Overall, it has a very un-levered balance sheet. The bull case couldn’t be more clear.
We can’t do this list and ignore Apple (NASDAQ:AAPL), right?
Let’s start with the bad. The company has $94 billion in long-term debt and almost $260 billion in net liabilities. However, this debt is sort of misleading. Rather than repatriate all of its funds held overseas and pay a high tax rate, Apple pays a minimal amount in interest to borrow money instead.
That money is then used to buy a massive amount of stock. This year alone, Apple tacked on $100 billion to its buyback fund. Warren Buffett has been a steady (and massive) buyer of Apple. Do you think he would do so if its balance sheet were a big risk?
I will be the first to admit, I don’t love seeing $100 billion in debt for a company. But measured against its assets and cash flow, it’s more a financial engineering situation than outright toxic debt. Consider that Apple holds $170.8 billion in long-term investments and another $66 billion in cash and short-term investments. It has net receivables of almost $50 billion and is embarking on what is generally its strongest quarter.
Over the last year, Apple has generated a laughable $64 billion in free cash flow. Yeah, laughable as in that’s so much cash flow it’s hardly comprehendible. That should alleviate all concerns over the debt and tell you all you need to know.