In his classic 1949 work The Intelligent Investor, Columbia University professor Benjamin Graham lays out key principles that form the foundation of value investing today, including the parable of Mr. Market and the margin of safety concept. Much of the book, though, is devoted to what Graham saw as the ideal investment—companies whose cash and assets (minus liabilities) were worth more than the market price of the stock. In the years following the Great Depression, there were many of these so-called “cigar butt” stocks lying around, and early value investors such as the young Warren Buffett made millions on them.
Nowadays such opportunities are few and far between, but the idea that investors can protect against downside risk by seeking solid companies with fantastic balance sheets remains highly relevant. After all, it is very difficult for a company to go bankrupt if it has no debt. In light of today’s fully valued stock market, here are six companies with high returns on capital, very little debt, and boatloads of cash.
1. Sketchers (SKX)
Americans are familiar with Sketchers as the country’s second largest sneaker brand, although many probably do not realize that the company’s shoes are sold in over 160 countries. Sketchers owns 2,000 stores around the world and is doing well in a tough period for brick-and-mortar retail, with plans to open up to 90 locations in 2017. The company is also growing online sales and licensing revenue rapidly and has a strong global distribution network.
Right now Sketchers trades for a relatively inexpensive 17 times earnings, although the balance sheet tells an even better story. The $4.2 billion company has $750 million in cash on the books and less than $75 million in debt. Taking out the current assets and subtracting the liabilities leaves the actual shoe business valued at just 13 times earnings. That is pretty attractive for a company that returns 12 percent on invested capital and has experienced just one money-losing year in the last decade. Noted value investor and Ben Graham adherent Scott Black also owns shares in the company.
2. Chipotle Mexican Grill (CMG)
With 18 percent of Chipotle’s float being sold short, it is no wonder that my previous articles on the company have stirred up some controversy. But no matter what one thinks of Chipotle’s growth prospects, it is hard to argue that the $9 billion company is headed to zero with no debt and a war chest of $570 million in cash. Even during the height of the food safety scandal in 2016, Chipotle still turned a profit for the year, and over the last twelve months the chain has earned over $130 million.
Right now Chipotle is valued at more than 60 times earnings, but many investors (including me) believe that company will eventually return to previous levels of profitability. The prospect of recovery coupled with plans to double store count in the U.S. alone could mean that shares are actually valued below 20 times earnings. The storied Sequoia Fund, whose founder Bill Ruane was a Graham disciple and a close friend of Warren Buffett, recently purchased a sizable stake in the company.
3. Garmin (GRMN)
Ten years ago, Garmin was practically synonymous with GPS products. However, the rise of the smartphone and various map apps obliterated Garmin’s crown jewel. In response to a decline of its core vehicle GPS business, Garmin has pivoted into wearable products, which helped the company produce surprisingly strong earnings in the latest quarter.
In the meantime, the $9.7 billion company continues to throw off a ton of cash, and today it sits on a pile of dough totaling $1.1 billion. In the past twelve months Garmin has earned $670 million, meaning that the market is valuing the business at less than 13 times earnings. Garmin investors also earn a dividend of nearly 4 percent at the current share price. Oh, and the company is debt free.
4. J&J Snack Foods Corp (JJSF)
This New Jersey-based distributor of snacks and frozen beverages only has one analyst covering the stock, which means that the Street is virtually unaware of the $2.4 billion company’s huge success. J&J is primarily known for its pretzel, slush, churros, and funnel cakes—products that are not going out of style anytime soon. The stock has risen 240 percent over the last decade, and sales have grown for an incredible 44 consecutive years. The company has not had a single losing year in the last ten years.
It is not difficult to see why the market values J&J at 31 times earnings, but that valuation gives investors a fantastic company at a time when Americans are eating more snacks than ever before. Plus, the company has $140 million in cash, no debt, and consistent returns of 12 percent on invested capital.
5. La-Z-Boy (LZB)
The furniture manufacturer best known for its recliners has had a tough decade. Like large companies often do, La-Z-Boy shot itself in the foot by making a dumb acquisition. In 1999, the company bought LADD Furniture, which soon backfired amid competition from China and then the housing crisis. Between 2002 and 2009, La-Z-Boy went from a high of $30 a share to less than 90 cents. After losing $135 million during the financial crisis, the company appeared to be near death. Over the last ten years, though, La-Z-Boy has gradually unwound this nightmarish mistake by closing LADD factories and selling off assets.
Today, the $1.1 billion company is actually doing pretty well. The balance sheet shows more than $130 million in cash and only token long term debt. Sales and earnings are growing again following a rough post-Recession period, and the company’s reinstated dividend has grown eight-fold since 2013. Trading at less than 13 times earnings when cash is subtracted, La-Z-Boy generated $126 million in free cash flow in its last fiscal year. With relatively impressive earnings and a widely-known brand name, it is only a matter of time before the company is revalued upward or acquired.
6. Sanderson Farms (SAFM)
The third-largest poultry producer in the U.S. has benefited from a secular decline in red meat, which is increasingly recognized by the medical community as a risk-driver for cancer. With its high protein content and relatively little fat, chicken meat is seen as a healthier alternative. Avian flu outbreaks abroad have also shielded the U.S. from imports. Indeed, American chicken is seen as safer, and farmers here have experienced strong demand for exports.
Investors have traditionally valued food producers at low levels because their fortunes are closely tied to commodity prices over which they have little control. But with so many headwinds working in Big Chicken’s favor, producers have passed on rising feed costs to consumers. Among the major chicken companies, Sanderson probably has the most attractive financials. With $400 million in cash, no debt, and a P/E of less than 11 for the actual chicken business, the stock is still cheap despite a 55 percent gain over the last year.
Disclosure: I am/we are long CMG.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.