Now’s The Time For Low-Debt Stocks Like Gilead And These 3 Others To Pay Off
Companies with high debt lived in a sort of paradise in 2019-2021. With interest rates extraordinarily low, their debt burden didn’t hurt. Now it looks as if it was a fool’s paradise. Interest rates are rising, and the debt burden is beginning to bite.
I relish low-debt companies. They have little risk of bankruptcy and they enjoy strategic flexibility. They won’t need to sell a promising division to raise cash. If they ever need to borrow, the rate they pay should be reasonable.
The average company today has debt equal to about 60% of stockholders’ equity (corporate net worth). In today’s column, I highlight five companies with debt of 10% of equity or less.
Gilead Sciences GILD has disappointed its investors with a 2% cumulative return over the past three years. By contrast, the Standard & Poor’s 500 Index returned 48% over that period. And yet, Gilead is riding a 15-year profit streak. It earned more than 10% on invested capital in nine of the past ten years. And it has no debt whatever.
Gilead’s best-selling drugs are for the prevention and treatment of HIV infections. Veklury, for the treatment of Covid-19, also made a significant contribution to revenue last year. Its product line is diverse, and there are several potential cancer drugs in its pipeline. The stock sells for 17 times recent earnings, but less than 10 times the earnings analysts expect for the year ahead.
MORE FOR YOU
Based in Cambridge, Massachusetts, Moderna (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, the jumped to $18.4 billion in 2021. For the past four quarters, it’s $22.6 billion.
Investors expect the stage 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 Spikevax Covid-19 vaccine will lead to other big hits.
As a speculation, Alpha & Omega Semiconductor Ltd. (AOSL) interests me. Based in Sunnyvale, California, this chipmaker has a market value of just over $1 billion, making it (just barely) a mid-capitalization stock.
Its profit history is spotty. It went public in 2010. Since then it’s had two years I’d consider great, one year I’d consider good, four loss years, and five years I’d consider mediocre. The company’s return on invested capital has been good (about 13%) in the past four quarters. It has bought down its debt to 4% of stockholders’ equity. Wall Street mostly ignores the company. Only four analysts publish opinions; three of those rate the stock a buy.
Another company with an unimpressive history but good results recently is Intrepid Potash (IPI). Russia and Ukraine have historically been big producers and exporters of fertilizer. With the two at war and Russia under sanctions, that’s unlikely to be true in the near future.
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 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 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, however, was trading at $188.50 as of May 6. So, investors have $14.50 of doubt that the deal will go through.
If the acquisition is consummated, that would be a 7.7% arbitrage profit. If it happens within six months, it’s 15% annualized. If the deal doesn’t go through, I’d still be happy to own Sanderson, which I’ve owned several times in the past.
I’ve written 19 columns about stocks with low debt. The average 12-month return on my picks has been 27.1%, which compares very favorably with 10.7% for the Standard & Poor’s 500 Total Return Index. Fifteen of my 19 columns have shown a profit, and 13 have beaten the S&P 500.
Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.
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%. Also in the red were T. Rowe Price Group (TROW), Sturm Ruger (RGGR) and Bio-Rad Laboratories BIO .
Disclosure: I own Moderna and Sanderson Farms personally, and in a hedge fund I run. (In the hedge fund, the Moderna position is in the form of call options.)
The Spending Breakdown: Here’s What We Bought In February
It’s been a financial doozy out there for consumers lately, to say in the very least. Inflation continues to bubble up to the forefront of many stories, followed by tech sector layoffs and skittishness within the banking sector.
On March 15, the U.S. Census Bureau released its results for retail sales in February. The report is a useful roadmap that provides insight into what consumers are prioritizing and spending on. It also showcases the segments within retail where consumers might have cut back or pared down.
February was a mixed bag for consumers. In response to the results, Chip West, a retail and consumer expert at Vericast, a marketing solutions company, noted that higher interest rates seemed to affect some consumer discretionary purchases.
“Consumers have been under intense pressure from continued high inflation where interest rates are headed,” writes West in an update.
Overall, consumers spent $697.9 billion in February, sightly down from $700 billion in January. Within these numbers, many categories for this round showed slow to no increase, while some declined.
Digging a bit deeper, non-store retailers were among the biggest winners, with consumers spending $112,722 billion, up from $110,956 billion in January. General merchandise stores reported $73,794 billion, up from $73,392 billion. Within that category, department stores edged down to $11,579 billion from $12,056 billion in January.
MORE FOR YOU
Groceries have been a large part of the spending narrative over the past few quarters because of inflation. The increase in spend on food and groceries continued in February with consumers plunking down $81,014 billion in February, up from $80,618 billion in January. During those same time periods, grocery stores were up slightly to $72,540 billion from $72,142 billion.
Consumers paid slightly more for electronics (a total of $7,214 billion) during this time period as well.
We are also still tightening our proverbial belts by cutting back on some purchases, and February was no exception. Furniture and home furnishings, for example, took a hit, reporting $12,048 billion in sales compared to $12,359 billion in January.
In the automotive department, motor vehicles and parts also slowed to $130,647 billion from $133,037 billion. Meanwhile, gasoline stations reported $58,379 billion, down from $58,721 billion in January.
Finally, we bought less clothing totaling $26,691 billion compared to $26,906 billion in January and dined out slightly less at $92,740 billion in February, down from $94,789 billion in January.
The results are not all dismal, according to Neil Saunders, managing director of GlobalData. Saunders sees retail sales as being in “positive territory with overall spending up by 5.6% over the prior year.”
Importantly, “Consumers continue to dig deep to fund consumption and are showing remarkable resilience despite various unfavorable economic factors,” according to Saunders. Despite digging deep, however, consumers are also “gradually changing behaviors to cope with higher inflation and numerous pressures on their household budgets.”
As we head into spring, one thing remains clear: the consumer may be battered, but the spending isn’t going away. The next report is expected on April 14 and will help us round out and complete the spending picture for the first quarter of 2023.
A Deeper Look At DeSantis’ Anti-ESG Legislation: What Is ESG?
Florida’s anti-ESG legislation, championed by Governor Ron DeSantis, is positioned to be the model for anti-ESG legislation in the United States. 20 Republican Governors have already signed on to adopt similar policies. The legislation itself is massive and sweeping, touching on multiple areas of law and policy. This is the first in a series of articles that will deep dive into Florida’s proposed legislation and look into its potential impacts in the larger ESG debate. However, before looking at the language of the legislation, we must start at the beginning. What is ESG?
ESG stands for environmental, social, and governance. It has gone by other names over the years including impact investing, social impact investing, and sustainable investing. At its core, it is an investment strategy. A way to use your money to impact change. We often see this in political movements. Conservatives boycotting Disney because of “woke” policies, or going to a business to support their Christian values. Liberals boycotting businesses over Black Lives Matter stances, or supporting environmentally friendly companies. Companies know that, and they include it in their marketing strategy.
In theory, ESG just took that to the next step and applied it to your retirement funds, giving you the option to choose how your money is invested. Fund managers already present their clients with multiple options, allowing the investor to choose their level of risk. ESG adds another option, where the investor can choose a lower return, but feel like their money is doing something good. Investing in a green company may not make you as much money, but you’ll feel like you’re doing your part to help the environment. If that is your choice, you should be allowed to make it. However, ESG took on a life of its own.
If I told you that the United Nations developed a plan to manipulate financial investments to force businesses to enact environmental and social policies that align with their goals, announced by Al Gore, you would probably start pushing me into the conspiracy theory category. Yet, it happened. It didn’t happen in secret. There are no leaked documents or conspirators. It happened in public, through public meetings, with clearly stated goals and outcomes, and they held a press conference to announce it. We just didn’t know what they were talking about.
That push drove ESG, primarily in the European Union. This rapid growth was problematic for those tasked with making financial decisions. The first real issue for ESG was the lack of clarity. Sure, “e” stands for environmental, “s” stands for social, and “g” stands for governance. “C” is for cookie, and while that is good enough for the Cookie Monster, that is not good enough in the world of financial investments. Terms need clear definitions, measurements, and projected outcomes.
MORE FOR YOU
When most people discuss ESG, they gravitate towards the environmental piece. It appears to be fairly self-explanatory; a company that is environmentally friendly. However, environmentally friendly is a vague term. It could be a reduction in waste, adding solar panels, low emission vehicles, or any number of factors, all of which are self-reported by the company. As no reporting standards are currently in existence, companies can make their claims based on their own internal calculations, and fund managers can make their choice to invest based on what they choose to prioritize. This has led to what is known as greenwashing, or when a company exaggerates its environmental policies in order to appear more environmentally friendly than they really are.
Do not overlook the social and governance components, as that is where the real conflict arises. In the United Kingdom, social includes investment in affordable housing. In the European Union, it looks at factors like the use of slave labor in the supply chain. In the United States, it includes diversity and inclusion. Those factors, and how they are weighed, vary wildly from jurisdiction to jurisdiction and fund manager to fund manager. ESG is not just about the environment.
There are international efforts to create reporting standards, but they will not be released until later this year and no front-runner has been selected. That alone is problematic, to say the least.
To this point, I’ve presented ESG as if it is your choice, but ESG has taken a turn from elective to mandatory. A select group of fund managers followed the UN’s lead and started including ESG factors in all their funds, under the premise that ESG is good for the long-term growth of a company. This approach has wide ranging impacts. It effects long-term growth calculations for publicly held companies. It impacts credit ratings for government bonds. Banks are calculating the risk of business loans and accounts based on ESG. What was an abstract concept a few years ago, is now directly driving sectors of the business and financial markets.
In response, business leaders and Republican elected officials began pushing pack. The Trump administration introduced a Department of Labor rule limiting ESG that was eventually overturned under the Biden administration. States then started taking action. Texas struck first by adjusting how they invested state pensions. Florida followed soon thereafter by doing the same, then took it a step further introducing their anti-ESG legislation.
The legislation addresses five key areas: investment of state money, investment of pension funds, issuing bonds, banks, and government contracts. Those areas are about states controlling what they can control. Over the next few articles, each of those areas will be looked at in depth. What is happening in Florida could be the future of the anti-ESG movement in the United States.
Don’t Make A Mess Out Of The Texas Citizens Participation Act
The Texas legislature is considering a proposed amendment to the Texas Citizens Participation Act (TCPA), which is the Texas Anti-SLAPP law and roughly the equivalent to the Uniform Public Participation Act (UPEPA) which is in the process of being adopted nationwide. Because the proposed amendment has the potential to create more problems than it solves, and in fact may create a mess of things, some analysis is in order.
The TCPA is found at Texas Civil Practice and Remedies Code § 27.001, et seq. The TCPA basically provides that if one party files an action some sort of action which infringes upon certain constitutional rights of another party, that second party (movant) may file a motion to dismiss the action of the first party (respondent) in certain circumstances.
I will not go into the entire operation of the TCPA, but will instead here focus upon only the part that is relevant to the proposed amendment.
If the movant’s motion to dismiss is unsuccessful, then the movant may appeal under § 27.008 of the TCPA and the corresponding § 51.014(a)(12) that provides for an interlocutory appeal of a trial court’s denial of a motion to dismiss. Very importantly, § 51.014(b) provides that while this appeal is ongoing, all other proceedings at the trial court are stayed pending the appeal.
The stay pending the resolution of the appeal is necessary to avoid potential wasted effort by the trial court and the litigants. Otherwise, if the litigation were to proceed before the trial court while the appeal was ongoing, but the appeal later reversed the denial of the TCPA motion, everything that the trial court and the litigants would have done in the interim would be totally wasted activity.
Of course, the respondent who defeated the motion to dismiss wants to get on with their case, but the truth is that the stay pending appeal is probably not going to be very long anyhow, because § 27.008(b) provides that “[a]n appellate court shall expedite an appeal or other writ, whether interlocutory or not, from a trial court order on a motion to dismiss a legal action under Section 27.003 or from a trial court’s failure to rule on that motion in the time prescribed by Section 27.005.” So, if there is a delay in the litigation, it should be only a short one and thus there is no need for a relief from the stay.
MORE FOR YOU
The bottom line is that there is nothing wrong with this stay during appeal as it currently exists in the statutes. It doesn’t need fixing. Nevertheless, in SB896/HB2781 the Texas legislature is considering tinkering with § 51.014 to limit the application of the stay pending appeal to three circumstances:
First, where the motion to dismiss failed because it was untimely under § 27.003(b);
Second, where the motion to dismiss not only failed, but was also deemed to be either frivolous or assert solely for the purposes of delay, per § 27.009(b); or
Third, where the motion to dismiss was denied because an exemption to the authorization of the motion existed (such as commercial speech, wrongful death claims, insurance disputes, evictions, etc. ― Texas has a bunch of such exemptions) under § 27.010(a).
The reason for this tinkering is implicit: If the TCPA motion to dismiss does not seem like a close call, there is no reason to delay the litigation while the movant (who lost the motion to dismiss) prosecutes what is likely a fruitless appeal.
Except that there is.
The hard truth is that trial courts frequently get things wrong. So frequently, in fact, that states such as Texas have full-time appellate courts with numerous districts to review purported errors by the trial courts. Particularly where the state courts are asked to consider matters with constitutional implications ― issues which, unlike the federal courts, they rarely deal with ― the state courts have a tendency to err. Plus, once a trial court has made one misjudgment, the effect is usually to snowball and result in other bad rulings that follow, such as sanctioning a party who was right in the first place.
Thus, long ago it was determined that it did not make any sense for litigation at the trial court level to go on at the same time that there was an appeal pending, for the reason that if the appeal ends in a reversal then whatever the courts and the parties were doing up to that point in the trial court becomes a giant pile of wasted judicial resources and efforts. This is the very reason why § 51.014(b) stays activity at the trial court level for interlocutory appeals. Such is even more important in the Anti-SLAPP context, such as with the TCPA, where one of the primary purposes of such statutes in the first place is to conserve the judicial resources of the courts and the parties — and particularly the party against whom abusive litigation has been brought.
However, the single counterargument against allowing the litigation to go forward during the appeal as in the proposed Texas amendment is this: The appeal is not going to last very long anyway, because of the mandate of § 27.008(b) that the appellate court must resolve a TCPA appeal expeditiously. Because the appeal period will be short, there is really no compelling reason to risk wasting judicial resources and the parties’ resources in the meantime. The proposed amendment to the TCPA is a solution in search of a problem.
It also must be considered that what the Texas amendment really attempts to do is to negate what amounts to a frivolous appeal by a party that has lost its TCPA motion. However, there is already a remedy for that, which is that the Texas Court of Appeals may itself award monetary sanctions for a frivolous appeal. Thus, if a party files a bogus appeal of the denial of their TCPA motion, the Court of Appeals may award appropriate monetary sanctions, not just against the party who brought the appeal but also against the counsel who filed that appeal. This is a significant deterrent to the bringing of such appeals.
But let us consider what might be done in these circumstances if somebody really just wanted to do something for the sake of doing something. It would not be the proposed Texas amendment. Instead, the appropriate solution would be to allow the Court of Appeals the discretion to lift the stay under § 51.014(b) upon the request of a party or upon its own initiative in the described circumstances.
What happens with all appellate courts, including the Texas Court of Appeals, is that the particular panel makes a decision on the outcome of the appeal pretty quickly. The delay in the Court of Appeals issuing its ruling is that it takes time to write the opinion to support the ruling. If the Court of Appeals knows that it is going to rule to deny the appeal, then the Court of Appeals at that time could lift the stay at the trial court level in anticipation of their future formal decision denying the appeal.
The problem of the stay pending appeal is not a trial court issue, and should not be resolved by changing what goes on with the trial court, but instead is an appellate issue that should properly be resolved (if at all) by allowing the Court of Appeals the option of terminating the stay. One thing is certain: The proposed amendment to the TCPA that automatically terminates the stay is not the way to deal with this issue ― if, indeed, an issue actually exists at all.
Interviews1 year ago
Interview with Jean-Francois Desormeaux, Real Estate Investor
Business News10 months ago
NFTMagazine.com Is Bringing NFTMag Conference 2022 to Miami this Year Says JetSetFly
Technology7 months ago
General Atlantic buys out SoftBank’s 15% stake in edtech Kahoot, now valued at about $152M vs the $215M SoftBank ponied up 2 years ago
Interviews12 months ago
Paying it Forward — Meet Dr. Jonathan Kenigson, the Founder of the World’s Leading Think-Tank in the Quadrivium
Interviews4 months ago
Interview with Justice Mitchell, A 16-year-old Student-Athlete Who Received a Basketball Scholarship Offer from Pennsylvania University Greater Allegheny
Entrepreneurship1 year ago
600% In Under 5 Years, Financial Advisors Grow Business By Podcasting And YouTube
Entrepreneurship1 year ago
Muminovic Benjamin E-commerce on Shopify the Course of the Business Man
Community9 months ago
The Bassnectar Community – It Belongs to All of Us