Why You Should Invest in Companies with Little Debt and Lots of Cash

The financial markets have changed and the way to invest in them have changed. Although better than a year ago, you cannot value a company on fundamentals alone in this turbulent market. Companies that need to have credit are finding it difficult, if not impossible, to raise capital through the typical credit markets to continue to grow or even survive.

For this investing strategy, it is important to select only strong companies that are not directly involved in the financial, insurance, housing, lending or banking sectors. Again, the intention of this strategy is to hold strong, devalued companies with a lot of cash, and little debt, for five or more years.

Where the debt-to-capital ratio was important in selecting a company in the past, it is now becomes a primary selection criteria when screening stocks. Having a lot of cash also gives these companies opportunities that they may be able to capitalize on while other companies are so critically devalued. When the whirlwind finally settles, and the stock market begins to turn, companies with a high cash balance on their books will undoubtedly be the healthiest.

Example

Using my online broker's stock screener, I created a search for companies with a little or zero debt to capital ratio. I did not filter the search any further regarding fundamentals. Here are the criteria I used for the screen:

Market Segment: Large Cap and above (Companies with a market capitalization value of more than $10 billion).

Fundamentals: Debt to Total Capital ratio (Debt/Cap) less than 5%.
Included: NYSE, NASDAQ and AMEX.

This stock screen produced 32 companies, 16 of which had a debt to capital ratio of 0%. It's not surprising that half of the 16 companies are from the technology sector; additionally two others are from the service sector that I believe are still sort of "tech stocks", eBay (EBAY) and Yahoo! (YHOO).

Consider another company on the list. Celegene (CELG), part of the health services sector.

Celegene is a biotechnology company that discovers and creates drugs and treatments designed to treat cancer and other diseases. It's two leading products, Revilimid and Thalomid are used in the treatment of myeloma, a cancer in plasma cells.

Celegene currently holds $1.2 billion in cash and has a small $23 Million in long-term debt. Celegene is not only completely liquid, they are adding value to the world and are a long way from the crisis affected sectors.

This is a company that should sustain well through the financial crisis and thrive as the country begins to recover. With additional fundamental analysis, this may be a candidate to add to your portfolio.

Given the current state of the economy and stock market, each of us faces a choice. Are you fearful and pessimistic or are you optimistic about the opportunities that may exist? If you have five or more years to hold positions, there may be some very good opportunities to invest in and an optimist you should be!