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One of my earliest lessons in investing was to avoid companies that had enormous levels of debt and low levels of free cash flow. That’s because companies with lots of debt have to spend a lot of their revenue on paying interest on that debt. That would leave little cash left over to grow or reinvest in the business.
Low-cost debt is great if a company can get it, and if it generates so much cash that paying interest means nothing material. But having no debt at all is even better. That means that every penny of cash flow the company produces is either going back into the company, or gets paid out to you as a dividend.
Here are three growth stocks that have no debt you might want to consider.
Monster Beverage Corp. (NASDAQ: MNST) has certainly lived up to its name, making a monster impression in the very competitive world of beverages, while making monster profits. The company has created a real brand unto itself, even as legacy world-class brand names have stumbled and slowed down.
Like most beverages, it operates with direct-store delivery and warehouse divisions. Yet it has managed to create some very unique labeling and product lines that really differentiate it from other companies. Whether its energy drinks, dairy drinks, coffee drinks, protein drinks, or iced teas, Monster has carved out a profitable niche and may be the beverage play for the next 10 years.
The company has about a billion dollars of cash on hand, no long-term debt, and normally generates $200-300 million in free cash flow annually. In the trailing 12 months, however, it is almost $400 million.
Visa (NYSE: V) is a real favorite of mine. For starters, its part of an oligopoly. Anytime you can buy into a sector with limited players who effectively control the space, you want to. Amazingly, after all these years, Visa continues to grow . . . and grow strongly, at about 17% annually.
There’s no surprise that Visa carries no debt. As a financial services company operating in areas with extremely high margins, the company has been able to generates enormous free cash flow on a regular basis. On the low end, it produced $2.5 billion in FY13. In FY12 it was $4.7 billion. In FY14, it soared to $6.7 billion.
Meanwhile it carries $.54 billion in cash and no long-term debt.
Michael Kors Holdings (NASDAQ:KORS) is not a company you might expect to have a stellar balance sheet with no debt. It is, after all, a retail company. I am scared of retail because consumers are very fickle and tastes can change on a dime. The market is littered with high-flying clothing retailers that have blown up.
The difference with KORS, however, is that it is a luxury retailer with international presence and a global brand name synonymous with “high class.” That has permitted it to endure. It also has a very keen management group that really observes trends and styles.
KORS is still growing at around 20% per year, and has a cash position of around a billion dollars. Free cash flow has been exploding over the past few years, from a mere $27 million in FY11 to $235 million in FY12 and $450 million in FY13. It’s a great brand at a great price.