Everyone in the market asks the same question.
I do. So does everyone I work with. So do Buffett, Soros, Paulson, investment bankers, and everyone with money to save.
Any attempt at nuance in your answer to “The Question” has seemed like equivocation over most of the last decade. Even the pros just wanted the elevator pitch.
“What’s your favorite [stock/ sector/ trend/ etc.]?”
Money poured in and debt was cheap. It wasn’t a question of if your favorite stocks were going up, only if they could keep up, and investors have been historically lax about their standards.
At last, it seems like my answer to “The Question” depends more on the company than the broader market. And, at last, there is a clear trend that works for every kind of investor.
Here are three companies, bound by one common theme that can work for any kind of investor, and nothing else.
Interest rates are going up. Years of nearly free debt are being rotated into more expensive debt. A wave of markdowns is right around the corner, and revenues, cash flows, and profits will suffer.
Meanwhile, these companies make good money, have done a great job of managing their books, and will not be held back by their obligations, unlike their peers.
The Safe Financial Play
T. Rowe Price Group, Inc. (NASDAQ: TROW) has been on a tear over the last year. Shares are up well over 70%.
Plus, it is the second largest holding in the S&P 500 Dividend Aristocrat ETF, which only holds shares of companies that have increased dividend payments every year for 25 years straight.
More importantly in my book, management has delivered this level of share and dividend performance while maintaining virtually no debt.
Current liabilities total up to under $1 billion with just under $1.7 billion in cash and equivalents, $5 billion in revenue over the last four quarters, and no long-term obligations.
Meanwhile, its trailing twelve month (ttm) price-to-earnings ratio is hovering below 20, and it sports a 2.3% dividend yield.
As its peers have to rotate debt, mark down revenue due to rising interest rates, and potentially limit investment strategies based on cash flow for years to come, T. Rowe Price can just keep on keeping on.
You’d be hard pressed to find a similar company in the financial sector that has stayed focused on its core business mode, and has remained as disciplined, as the Fed practically threw free money at it.
Blue chips and financial stocks have largely leveraged up as much as they could. Many financial stocks will get hit from both sides as interest rates rise, affecting their own balance sheets along with the stocks they hold.
T. Rowe Price won’t face the same kind of pressure, as it has a whole lot of room to maneuver and soak up any short-term problems with its cash reserves or short-term debt instead of selling holdings or issuing bonds on other people’s terms.
The Aggressive Play
I talked about Nvidia (NASDAQ: NVDA) back at the very end of January. I still think it is an amazing company, even if its shares are a bit expensive.
It is a chipmaker with everything on its side compared to its closest rival, AMD:
- It controls just under three quarters of the GPU market.
- With a market cap of $146 billion, it is around 12 times the size of AMD.
- It pulled in $9.7 billion in revenue and $5.8 billion in profit last year, compared to AMD’s $5.3 billion in revenue and $1.8 billion in profit.
- And here is the big one, NVDA has $7.3 billion in cash and only $2 billion in debt, while AMD has $1 billion in the bank and $1.4 billion of debt.
NVDA can erase its debt whenever it wants. Meanwhile, AMD will be struggling to do so while maintaining the capital-intensive research and investment it needs to have any chance of keeping up.
NVDA also expects earnings growth of 60.6% for the current year, which will further reduce the significance of the debt.
The graphics processing unit specialist’s revenue jumped 66%, GAAP earnings per share soared 151%, and adjusted EPS surged 141%.
And it is diversifying at an incredible pace. Its data center segment grew its revenue 71% year-over-year to $701 million.
The total addressable market is expected to grow 18 times over to reach $50 billion over the next five years.
With the debt obligation of its rival and with fantastic growth, NVDA will be flush with cash to throw at capex and R&D to take advantage of it.
The Speculative Play
And finally we have the kind of play that involves small companies with little to no revenue.
These are companies that will have proportionally very high debt-to-cash-and-revenue ratios, so why add one to this list?
Because it is worth evaluating share structure of small, speculative companies and viewing that as a major part of their obligations.
If you haven’t read Nick’s article about what questions to ask junior miners, now is a good time.
The short version is that you need to know how many shares a company has issued, outstanding and fully diluted.
You need to know who owns the cheap shares and warrants and what price they got them for.
And you need to know about management’s plans, fiscal discipline, and preferred method to raise capital.
And those are just the quick and easy screening questions.
Nick has been doing this for a long time now, and recently found a spectacular junior miner with far fewer obligations than its peers.
I’ll let his research explain the company. You’ll be hard pressed to find another like it in the market.
It has a solid share structure, great management team, and reserves that could make it America’s biggest gold mine one day.
Plus, a major company just bought a large stake. Unfortunately, there may not be much more time before it buys up the rest, or another big miner takes even more shares out of the market.
