Alphabet Inc., the parent to Google, is back on my Balance Sheet Powerhouse list for a fifth time.
This list honors companies that show unusual financial strength. I have compiled it 12 times, 2001-06 and 2011 to the present.
Benchmark Electronics Inc. (BHE) of Angelton, Texas, which makes circuit boards and other electronic assemblies, joins the list for a fourth time. Aside from Alphabet and Benchmark, no companies that made the roster this year have been on it more than twice.
Only 15 U.S. companies made the Powerhouse list this year, the fewest since 2002. Companies are borrowing more money and maintaining scantier reserves against unexpected events. That’s partly because interest rates have been low, and partly because the years since the financial crisis of 2007-09 have been challenging.
To make the list this year, a company needed to jump these hurdles:
» A market value of $1 billion or more.
» Headquarters in the United States.
» Debt no more than 10 percent of stockholders’ equity.
» A current ratio (current assets to current liabilities) of 3 or more.
» Positive earnings
» Interest coverage of at least four. (That’s earnings before interest and taxes divided by interest paid.)
To make the Powerhouse list is a distinct honor but not necessarily grounds for a stock recommendation. These are excellent companies, and often priced as such. As a stock picker, I’m seeking strong companies that are also undervalued.
Nine companies are back on the list for a second time: Atmel Corp. (ATML), Cal-Maine Foods Inc. (CALM), Coherent Inc. (COHR), Foot Locker Inc. (FL), First Solar Inc. (FSLR), Guess Inc. (GES), Sanderson Farms Inc. (SAFM), Simpson Manufacturing Co. (SSD), and UniFirst Corp. (UNF).
It’s a diverse lot. Atmel makes semiconductor chips; Cal-Maine is an egg farmer; Coherent manufactures lasers; Foot Locker sells athletic shoes and clothes; First Solar makes solar panels and installs large-scale solar installations; Guess produces jeans; Sanderson Farms raises chickens; Simpson makes construction products; and UniFirst provides workplace uniforms.
We also welcome to the Powerhouse list four new companies: Arista Networks Inc. (ANET), Atlantic Tele-Network Inc. (ATNI), Columbia Sportswear Co. (COLM) and Ellie Mae Inc. (ELLI).
Absent from this year’s list were some companies that had won honors frequently in the past. Qualcomm Inc. (QCOM), a 10-time honoree, has taken on close to $11 billion of debt and no longer meets the debt-to-equity standard. Microsoft Corp. (MSFT), on the list six times in the early years, now has debt equal to 58 percent of equity.
Each year I select a small number of companies on the Balance Sheet Powerhouse list as stock recommendations.
In 11 previous outings, my picks have averaged an annual return of 18.2 percent, compared with 6.7 percent for the Standard & Poor’s 500 Index. My selections were profitable in six of the 11 years and beat the index seven times.
Bear in mind that results for my column picks are theoretical and don’t reflect actual trades, trading costs or taxes. The record of my column selections shouldn’t be confused with the performance I achieve for clients. And past performance doesn’t necessarily indicate future results.
From this year’s 15 stocks, I recommend four: Benchmark Electronics, Cal-Maine Foods, First Solar and Sanderson Farms.
Benchmark is in a brutally competitive niche, contract circuit-board manufacturing. Its net profit margin, just over 3 percent, would be considered bad in many industries but is good in this one. As I noted in another recent column, Benchmark is selling for less than its book value (corporate net worth per share).
Cal-Maine, based in Laurel, Mississippi, is the largest egg producer in the U.S. It has acquired a number of organic farms, and is benefiting from consumers’ willingness to pay more for organic products. It pays a fat dividend of $2.40 a share, which seems secure. The estimate dividend yield over the next six months is above 6 percent.
First Solar is coming back from weak years in 2011 and 2012 but is still far from the profitability level it achieved in 2007-10. The Obama administration was a big advocate of solar power. The company’s future will be influenced to some degree by the coming election, but I think solar will continue to gain market share from coal and other fuels.
I’m recommending Sanderson Farms for the second year in a row. As I’ve noted in past columns, chicken continues to gain market share from beef in the U.S. Periodic outbreaks of bird flu depress Sanderson’s price from time to time, but I consider it a solid holding.
Disclosure: I own Cal-Maine Foods and Sanderson Farms shares personally and for most of my clients. I currently have no positions in other stocks mentioned in today’s column.
John Dorfman is chairman of Dorfman Value Investments in Boston and a syndicated columnist. He can be reached at email@example.com.