5 low-debt companies to keep an eye on

COMPANIES with high debt lived in a sort of paradise from 2019 to ’21. With interest rates extraordinarily low, their debt burden didn’t hurt.

Now interest rates are rising, and the debt burden is beginning to bite.

I relish low-debt companies. They have little risk of bankruptcy and enjoy strategic flexibility.

In today’s column, I highlight five companies with debt of 10 percent of equity or less.

Gilead Sciences

Gilead Sciences Inc. (GILD) has disappointed its investors with a 2 percent cumulative return over the past three years. By contrast, the S&P 500 returned 48 percent over that period.

Yet Gilead is riding a 15-year profit streak. It earned more than 10 percent on invested capital in nine of the past 10 years. And it has no debt.

The stock sells for 17 times recent earnings, but less than 10 times the earnings analysts expect for the year ahead.

Moderna

Based in Cambridge, Massachusetts, Moderna Inc. (MRNA) burst into prominence when it developed one of the two leading vaccines for COVID-19. The company’s revenue was less than $1 billion through 2020, then jumped to $18.4 billion in 2021. For the past four quarters, it has been $22.6 billion.

Investors expect the coach to turn into a pumpkin when the pandemic fades. That’s why Moderna shares fetch a mere four times recent earnings.

Their fears could be right, but I think the research prowess Moderna displayed in developing its vaccine will lead to other big hits.

Alpha & Omega

As a speculation, Alpha & Omega Semiconductor Ltd. (AOSL) interests me. Based in Sunnyvale, California, this chip maker has a market value of just over $1 billion, making it (just barely) a mid-capitalization stock.

The company’s return on invested capital has been good (about 13 percent) in the past four quarters. It has bought down its debt to 4 percent of stockholders’ equity.

Intrepid Potash

Another company with an unimpressive history but good results recently is Intrepid Potash Inc. (IPI).

Fertilizer prices have been rising fast. Most investors who want to play this theme will turn to big-company stocks such as CF Industries Holdings Inc. (CF) and Mosaic Co. (MOS).

Intrepid Potash is far smaller than these, and riskier, but I like it that the stock is cheap (less than four times earnings) and the company is debt-free.

Sanderson Farms

Sanderson Farms TK (SAFM), a chicken producer, agreed last year to be acquired by a joint venture of Cargill and Continental Grain (both privately owned). The agreed price was $4.53 billion, or $203 per share, in cash.

The stock was trading at $188.50 as of May 6, however. So, investors have $14.50 of doubt that the deal will go through.

If the acquisition is consummated, that would be a 7.7 percent arbitrage profit. If it happens within six months, it’s 15 percent annualized.

The record

My column from a year ago was one of the four that showed a loss. All four of my picks declined, with the booby prize going to Logitech International SA (LOGI), down 44 percent. Also in the red were T. Rowe Price Group Inc. (TROW), Sturm Ruger & Co. (RGGR) and Bio-Rad Laboratories (BIO).