Is the Fed done jacking up interest rates or not? Angst over that question is torturing the stock market — but a handful of S&P 500 stocks are all but immune.
Turns out that 10 stocks in the S&P 500, including Monolithic Power Systems, Monster Beverage and Arista Networks, carry tiny amounts of debt relative to their cash flow, says an Investor's Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith. And that means they'll hardly feel a scratch even if the Fed keeps raising short-term interest rates.
And that could soon make all the difference. Low-debt companies in the stock market will hardly feel any pain from higher interest rates when it comes time to refinance.
The Fed's key interest rate has gone from zero to a range of 4.5% to 4.75% in the past year. The full impact of higher borrowing costs is still working its way through the economy, says Eli Salzmann, manager of the Neuberger Berman Large Cap Value Fund (NPRTX). "We're about to enter a very challenging, very rough environment," Salzmann said.
Keeping Debt Low In The Stock Market
Money has been practically free for years. And investors are appreciating some of the companies that avoided the temptation to load up on debt.
Shares of the 10 companies with the lowest debt-to-cash flow ratios, 13% or less, are up an average 8.9% this year. That's significantly above the 5.6% gain of the S&P 500.
Companies that resisted the urge to borrow are in the minority. Total debt held by S&P 500 companies at the end of the year rose 5% from 2022. Companies used the borrowed funds to finance dividends, buyback and to invest in their businesses. And that made sense when rates were low.
Debt is great when it's cheap. But it can quickly eat into profits when it's not. And that's where companies that avoided debt come in.
Low Debt Champs In The Stock Market
When it comes to top-performing stocks that skipped debt, a standout is semiconductor electronics company Monolithic Power. The company's tiny amount of debt amounts to less than 1% of its cash flow.
So even if rates are to rise, they'll hardly make a blip for the company. In fact, the company actually reduced its debt load by more than a third in 2022. Investors drove shares of the company up more than 42% this year.
Monster Beverage is another S&P 500 stock that's long shunned debt, even when it was cheaper. The energy drink company's debt is only 2.3% of its cash flow. Shares are lagging this year, rising just 0.2%. But the stock's long-term track record is stellar, in part due to its low levels of debt over the long haul. Shares of Monster are up more than 500% in the past 10 years through previous market cycles, while the S&P 500 is up just 161%.
Another tech company to forsake debt is networking company Arista Networks. The company's scant amount of debt is just 3.9% of its annual cash flow. It, too, took 2022 as an opportunity to lower its debt load by more than 17%. Shares are up more than 15% this year.
Just because a company has low debt doesn't guarantee success. But it certainly puts it in a better position than others in the stock market if rates continue to rise.
Lowest Debtors In The Stock Market
Based on total debt to adjusted cash flow (EBITDA or earnings before interest, taxes, depreciation, amortization)
| Company | Ticker | Total debt/EBITDA | Year-to-date % ch. | Sector |
|---|---|---|---|---|
| Monolithic Power Systems | 0.7% | 43.1% | Information Technology | |
| Monster Beverage | 2.3 | 0.5 | Consumer Staples | |
| Arista Networks | 3.9 | 15.9 | Information Technology | |
| Intuitive Surgical | 4.8 | -11.5 | Health Care | |
| Copart | 7.1 | 17.3 | Industrials | |
| Incyte | 8.2 | -3.5 | Health Care | |
| Old Dominion Freight Line | 9.3 | 25.2 | Industrials | |
| Garmin | 11.3 | 7.5 | Consumer Discretionary | |
| Moderna | 12.0 | -23.2 | Health Care | |
| Teradyne | 13.0 | 17.9 | Information Technology |
Sources: IBD, S&P Global Market Intelligence
Follow Matt Krantz on Twitter @mattkrantz
