In yesterday’s Wall Street’s Best Daily, I pointed out that interest rates are rising in the U.S. and will likely continue to rise during the next couple of years. To combat rising interest rates, I outlined a simple method of finding dividend-paying companies with minimal debt and strong balance sheets. Companies with these characteristics will likely perform very well if interest rates continue to climb.
How to Combat Rising Interest Rates
Today, I focus on companies with minimal debt and strong balance sheets that don’t pay a dividend. Finding companies that pay hefty dividends yielding 2.5% or more led me to slow-growing companies that are undervalued. Searching for companies that pay no dividends has a better chance of leading me to rapidly-expanding growth stocks. I am looking for companies that are plowing excess earnings and cash flow into research and development, marketing and expanded facilities.
To review: I set up a simple equation to measure the amount of debt. Benjamin Graham, considered the father of value investing, measured debt by dividing each company’s long-term debt by its current assets. Benjamin Graham’s formula was used in tandem with a separate formula that measured each company’s current assets divided by its current liabilities.
My next step is to screen all companies that do not pay dividends. That’s a very simple task and quickly changes the outcome of my search from value to growth. Undervalued companies tend to pay generous dividends, whereas growth stocks tend not to pay dividends.
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My Growth Screening Criteria is summed up here:
- Debt Burden (Long-Term Debt divided by Current Assets) = less than 5%.
- Current Ratio (Current Assets divided by Current Liabilities) = greater than 2.00.
- Dividend Yield = 0.0%.
The Results of this screen using my 1,000-stock Benjamin Graham database include the following 10 stocks:
10 Growth Stocks to Consider
Alphabet (GOOG) – Internet Software & Services
Cambrex (CBM) – Life Sciences Tools and Services
EPAM Systems (EPAM) – IT Consulting & Other Services
Facebook ((FB) – Internet Software & Services
ICU Medical (ICUI) – Health Care Supplies
Manhattan Associates (MANH) – Application Software
Monster Beverage (MNST) – Soft Drinks
National Beverage (FIZZ) – Soft Drinks
Ulta Beauty (ULTA) – Specialty Stores
United Therapeutics (UTHR) – Biotechnology
These companies are well qualified to withstand stock market disruptions caused by concerns over rising interest rates. Each company boasts a strong balance sheet with ample current assets to maintain future growth. These companies also apply their excess earnings to investing for the future growth.
Data screens are helpful, but the results only provide half the story. The future prospects of each company need to be examined before purchasing any of the stocks. I rely on research reports and each company’s website to form my opinion on whether the company’s future outlook is worthy of my purchase.
Why am I looking for growth stocks? Even as a value investor, I continue to recommend that you invest half of your portfolio in value stocks and half in growth stocks. The allocation can vary depending on your circumstances, but owning both value and growth stocks provides diversification, stability, income and growth.
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My performance record speaks for itself. Since inception on December 31, 1995, the Cabot Value Model has provided a return of 1,099% compared to a return of 701% for Warren Buffett’s Berkshire Hathaway (BRK-B). During the same 21-year period, the Dow gained just 307%. So don’t wait. Start your subscription today.
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