I learned long ago that we can get an edge on our careers and on our portfolios by doing the homework that others won't and working when others rest.
Not including today, we still have 1% of the trading year left to go. I'll be working and rummaging through all the carnage in the individual stocks in this market to see if we can find a few nuggets at which to nibble. With the coming wave of a trillion-dollar washout in the energy and most other commodity sectors and a general trend of higher rates ahead, I'm going to focus on companies with extremely strong and liquid balance sheets. That means with billions or tens of billions of dollars in net cash.
Here a few names I've recently been asked about and have done some work on, but found reasons to pass on all of them:
Trip Advisor (TRIP) -- I've long been shocked at how defensible and profitable the app/Web travel businesses have been. TRIP is growing 15% to 20% per year, has a little bit of net cash and is trading at 43x next year's earnings and 7x next year's revenue estimates. It's not a screaming buy to me, but I certainly would not short this stock without a good reason.
Taser International (TASR) -- This is probably the single best way to invest in the future of police camera wearables. I don't like to invest in a company that needs to lobby the government for spending on weapons, as Taser's core business requires. The company has a small amount of net cash, is growing 15% to 20% per year and is expected to earn 37 cents per share next year, giving it a price-to-earnings ratio of 50. Not the stock for me.
Kratos Defense and Security Solutions (KTOS) -- This looks like a short opportunity more than a buy opportunity. The company is a small-cap that's not profitable, isn't expected to be profitable any time soon and has $600 million in net debt. Ugly. I just looked up the puts on KTOS and they're not outrageously expensive. I might end up buying some puts on it after doing more homework. Thanks for the heads up.
VASCO Data Security International (VDSI) -- VASCO and its subsidiaries design, develop, market and support hardware and software security systems that manage and secure access to information assets worldwide. The company's growth rate has vanished and earnings are going to be down next year. But it's profitable and trading with a 17 forward P/E. It has a clean balance sheet with $130 million, or nearly $4 per share, in net cash.
White Wave (WWAV) -- I have been asked about WWAV several times over the last few weeks and I have been hard at work researching and analyzing it. White Wave produces, markets and distributes many of the brands that you see in a Whole Foods (WFM), or any other health-minded grocery store -- including the Horizon Organic milk and dairy products, the Silk-branded coconut, almond and other dairy alternatives and other similar brands. That sounds like the kind of healthy-eating trend I'm trying to get in front of.
But then I started digging into the valuation and balance sheet and that's when I ran into problems with getting excited about this stock. The company has little cash and more than $1.5 billion in debt. Revenue growth looks strong with analysts expecting 11% growth this year and next. But with earnings expected to grow from $1.16 per share this year to $1.39 next year, you're seeing some big assumptions that the company can deliver margin expansion at the same time.
That $1.39 estimate for next year gives White Wave a forward P/E of 31, but the $1.5 billion debt added to the $7 billion market cap makes the enterprise value to earnings a bit rich at 39. One other note is that the $1.5 billion in debt is equal to one-third of next year's revenue estimate, meaning there's little leeway for the company's finances here.
The Hain Celestial Group (HAIN) is growing 5% to 10% per year and is trading at only a forward P/E of 16. But the balance sheet is wracked with $800 million in debt and only $170 million in cash. The balance sheet will keep me out of the stock.
Applied Materials (AMAT) -- The company sells equipment that companies like Intel (INTC), Samsung, Micron (MU) and TSMC use to make their semiconductor chips that run smartphones, PCs, cars, cameras and refrigerators. The spending cycle from AMAT's customers isn't lining up as clearly as I'd like it to be for the next year or two. Samsung, Intel and Micron all seem to be struggling with their technological roadmaps ahead, each for very different reasons.
Micron (MU) -- It has $6 billion in debt to go along with the $6 billion in cash and that's not a strong enough balance sheet for me to get excited about the stock. It's cheap if the company can deliver on the $2.25 per share earnings estimate for next year, but the revenue growth was negative 10% this year. I'm not likely to buy this stock, given that balance sheet and questionable ability to meet forward growth estimates.
If you've got a stock or two with extremely strong and liquid balance sheets that you want me to look at, be sure to ask me about it by email, Twitter or in the comments section below.
I'm already long a dozen stocks, many of which I've owned for many years. That includes Facebook (FB), Google (GOOGL) and Apple (AAPL). There are several others with very strong balance sheets and potential upside that I've added recently, too. I'd like to find a few more names, so hit me with your best shot! Thanks. (White Wave, Facebook, Google and Apple are part of TheStreet's Action Alerts PLUS portfolio.)