If You Hate Debt, Then You Will Love These 3 Stocks

David Goodboy's picture

Tuesday, August 14, 2012 - 9:00am

by David Goodboy

Every time you turn on the financial news channels or read the business section in the newspaper, you hear or read about debt. It's truly become the new hot topic in economic circles. From the debt crisis in the European Union to the individual level, managing debt is fact of everyone's life.

Nowhere is this truer than in the corporate world. Corporate debt is a two-edged sword for companies. Used properly, it could act as a fuel, pushing the company forward. Misuse it, even slightly, and it could become a lodestone that can sink even the strongest company.

Corporate debt is growing to unbelievable levels. Overall, U.S. corporate debt is expected to reach $46 trillion between now and 2016, according to the latest research by Standard & Poor's. In fact, the corporate debt level has reached such an extended state that Standard & Poor's has warned of a "perfect storm" in the credit markets.

"This demand for funds (debt) will potentially compound the credit rationing that may occur as banks seek to restructure their balance sheets, and bond and equity investors reassess their risk thresholds," the S&P report stated. The scary part of the report:

"These factors, amid the current euro zone crisis, a soft U.S. recovery following the Great Recession, and the prospect of slowing Chinese growth, raise the downside risk of a perfect storm for credit markets. At best, we are at a fragile peace. At worst, we have created the makings of a perfect storm for the future."

If you saw the movie, "Perfect Storm," then you will understand this isn't a good thing for the economy, or companies saddled with debt.

One way investors can protect themselves against a potential perfect storm in the corporate debt markets is to invest in companies that have no debt. Yes, believe it or not, they do exist. These cash-rich, debt-free firms are better suited to weather any storm than their debt laden brethren. In 2011, according to CNBC, the S&P 500 returned just 2%, but the top 15 debt-free, cash-rich companies returned an average of 15%.

And if this isn't enough to convince you of the benefits of debt-free investing, then consider dividends. Cash-rich companies are more able to keep their shareholders happy by paying solid and consistent dividends because there is no need for debt service. 

With this in mind, here are my three favorite debt-free, cash-rich companies to invest in right now...

1. Sturm Ruger & Co. (NYSE: RGR)
Yield: 3.2%

This arms maker was founded in 1948 and is based in Southport, Connecticut. The firm boasts more than $95 million in cash and investments equal more than 43% of total assets. It's on an acquisition streak while buying back its stock. The company is currently offering a dividend yield of 3.2%. It goes ex dividend, for its quarterly dividend of $0.38, payable on Aug. 27. 

Sturm Ruger has posted impressive sales and is actually backordered on many of its products.

Provided the nature of the products, this isn't surprising. The worse things become in the worldwide economy, the more potential demand for firearms. I know this is sort of gruesome to think about, but it's a fact.

Looking at the company technically, price uptrended sharply from the first week of June until the end of July, before falling back. But the price has bounced off of the $44 level, creating a great technical buy signal right now. Buying in the $45 to $46 range with stops at $41 makes sense. I can easily see this company at $60 within 18 months.

2. Mastercard (NYSE: MA)
Yield: 0.3%

Here is an oxymoron for you. The company that provides easy debt for consumers is debt-free itself. Mastercard has more than $5 billion in cash and short-term investments equal to 47% of total assets. About 10% of the outstanding shares are held by insiders, with an astounding 83% held by institutions. Its earnings have been on a solid uptrend and it's well positioned to take advantage of the global transition to e-payments with a powerful brand name.

The company has a forward annual dividend rate of 0.3% and just went ex dividend on July 5. Technically, this stock looks like a channel trade right now. $410 is support with $450 being resistance. Buying as price approaches $410 with stops at $399 make solid technical sense. $450 is the upside goal within the year.

 

3. CH Robinson (Nasdaq: CHRW)
Yield: 2.3%

This transportation logistics company is lesser known. Its coiffeurs are full of more than $310 million of cash, it has 37,000 clients and 200 regional offices that provide it with wide demographic reach. It still suffers from the financial crisis and remains vulnerable to potential fuel price increases and shipping volume declines. But its net revenue has grown at 16% compounded during the past 20 years, not to mention it boasts a solid 2.3% dividend. Technically, shares are trading below the 200-day moving average, making the stock not eligible for my pullback system. But buying on a breakout close above $54 is a smart way to purchase shares of this debt-free company, with stops at $49.

Risks To Consider: Just because a company is debt free and has a strong cash position does not mean it's imperious to outside economic factors and other market risks. I think these three companies offer strong potential for investors, but always do your own due diligence prior to putting money at risk.

Action To Take --> I like all three of these debt-free firms. Sturm, Ruger & Co is my favorite of the group, though the technical and fundamental picture can change quickly. Remember to wait for your set up before entering, always position size correctly based on your capital and use stops.

David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of MA in one or more of its “real money” portfolios.