Many investors focus myopically on earnings growth. One factor they often neglect is balance-sheet strength.
To correct this oversight, I compile an annual list of Balance Sheet Powerhouses. It’s an honor roll, not necessarily a buy list. Some of the powerhouse stocks are priced in the ionosphere. But most years I find a few to recommend.
Powerhouses
To qualify as a Balance Sheet Powerhouse, a company must:
• Have a market value of at least $5 billion
• Carry debt no more than 10% of the company’s net worth
• Be based in the U.S.
• Have current assets at least twice current liabilities
• Have earnings of at least 20 cents a share
I’ve compiled the list from 2001 through 2006, and from 2011 to the present. This year, 49 companies made the roster, coincidentally the same number as last year, and tied for the second-most ever.
I recommend four of them.
Zoom
During the pandemic, Zoom Communications Inc. (ZM) stock jumped more than 500%, as millions of people had to learn how to video-conference. Zoom had first-mover advantage in those days. Today, video conferencing remains highly popular, but Zoom has competition from Microsoft Teams and Google Meet.
Its growth has slowed: Revenue was up only about 5% in the past year. Still, the company has a net profit margin of 33%. The stock sells for 17 times recent earnings and 15 times the profits analysts expect this year.
Mueller
Mueller Industries Inc. (MLI) has made the Powerhouse list the past three years, and I have recommended it each year. In the past 12 months, it advanced about 47%.
Based in Collierville, Tenn., Mueller makes refrigerator coils, tubing and a variety of other metal and plastic parts. It has shown a profit each year for more than 30 years. Debt is only 1% of the company’s net worth.
Mueller has benefitted from tariff policies under the Trump administration. Raw copper is mostly not subject to tariffs, but finished and semi-finished copper products face a 50% tariff.
Duolingo
Duolingo Inc. (DUOL) says its language-learning application is the top-grossing app in the education category on both the Apple App Store and Google Play. Its annual revenue, a mere $71 million in 2019, is now pushing $1 billion.
The stock climbed well above $500 last spring, but has fallen to about $120. I view the fall partly as a correction of the stock’s previous sky-high valuation: It sold for more than 600 times earnings in 2023.
Another factor in the decline was the departure of chief financial officer Matt Skaruppa. A third factor was the general downward cascade for software stocks, as investors suspect artificial intelligence will supplant traditional software.
Now, Duolingo stock is down to 15 times recent earnings. At this valuation, I find it attractive.
Edwards
Edwards Lifesciences Corp. (EW), based in Irvine, Calif., makes artificial heart valves and other medical devices and equipment for heart disease. The stock is more expensive than I normally go for, but the company has increased its earnings at a 15% annual clip over the past decade.
Multi-Year Winners
A few companies deserve recognition for making the Balance Sheet Powerhouse roster this year and 10 times or more in total. Dolby Laboratories Inc. (DLB) has made the list 15 times, the most of any company.
SEI Investments Co. (SEIC) has made it 13 times, and Intuitive Surgical Inc. (ISRG) 12 times. Arista Networks Inc. (ANET) and Cognizant Technology Solutions Corp. (CTSH) are 10-time winners.
Newcomers
We welcome 13 new companies to the list this year. The largest and best-known is Palantir Technologies Inc. (PLTR).
Other newcomers are Astera Labs Inc. (ALAB), BioMarin Pharmaceutical Inc. (BMRN), Krystal Biotech Inc. (KRYS), Nextpower Inc. (NXT), Powell Industries Inc. (POWL), Protagonist Therapeutics Inc. (PTGX), Reddit Inc. (RDDT) and Regeneron Pharmaceuticals Inc. (REGN).
Also: Toast Inc. (TOST), UiPath Inc. (PATH), Vicor Corp. (VICR) and West Pharmaceutical Services Inc. (AST).
Performance
In 21 years, the stocks I’ve recommended from the Balance Sheet Powerhouse list have achieved an average one-year return of 15.5%, compared to 11.1% for the Standard & Poor’s 500 Total Return Index.
A year ago, I recommended five of the Powerhouses. Two fell, but NEXTracker Inc. (NXT) rose 164%, pulling the average performance up to 43.5%, much better than the 15.7% figure for 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.
Disclosure: I own Duolingo in a hedge fund I run. I own Edwards Lifesciences personally and for most of my clients, and Mueller Industries for most of my clients.