Debt-Free Stocks Trouncing the Market Now

Track the companies that have been debt-free for five years.
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By Jeff Reeves of InvestorPlace



) -- There's something downright despicable about debt out there these days. From outrage over the massive federal budget deficit to a new resolve (or fear of unemployment) prompting Americans to once more live within their means, it appears that the days of easy credit and easy spending are becoming a thing of the past.

But what about corporations? The economic earthquake of the past few years has made debt an unavoidable reality for some, prompting them to borrow funds to keep the lights on. Others swooped in to buy out embattled competitors -- taking on billions in debt even if the strategic partnership was a relative bargain. The old adage that you have to spend money to make money seems to have held true even in these lean times.

But believe it or not, there is a fairly large group of companies out there living debt-free -- and reaping huge rewards of their fiscal restraint.

The First Cut -- 25 Stocks With Nearly No Debt

I compiled a list of the 25 largest companies (by current market cap) that carried a less than 1% debt-equity ratio across the last fiscal year -- and this "debt free index" has significantly outperformed the broader market.

Specifically, 17 of the 25 picks have a better one-year return than the S&P 500 -- with the entire list turning in average gain of 17% (median 14%) in the last year vs. 8% for the benchmark index. That's a 2-to-1 difference in the last 12 months.

The long-term returns are even more impressive, with 20 of 25 outperforming the market with an average five-year gain of over 140% vs. a five-year loss of 3% for the S&P 500! A few outliers did skew that number however, such as a 1,370% return in Chinese Internet giant

(BIDU) - Get Report

over the last five years, so a more realistic number is a median five-year return of 51%. A bit less dramatic, but no less impressive, considering the broader market is in the red.

The Second Cut -- 20 Stocks With Literally No Debt

Of course, some of these companies aren't purely debt-free -- since my first cut included companies with a tiny amount of debt that counts as little more than a rounding error on their balance sheet. These companies include

Marvell Technologies

(MRVL) - Get Report

, which carried $500,000 in long-term debt at the end of the last fiscal year and total debt of $2.5 million. For a company with a nearly $11 billion market cap, that's chicken feed.

But no matter how small the amount, debt is still debt. And five companies didn't have a zero balance on long-term debt at the end of fiscal 2009 -- specifically,


(ACN) - Get Report


Annaly Capital

(NLY) - Get Report



(SYK) - Get Report




and the aforementioned Marvell -- so they got the boot.

The result was that the returns were supercharged even more. The average 12-month return of the new list jumps to 21% (a median of 17%). The five-year average is a whopping 176%, with a median of "only" 69%!

The Last Cut -- 14 Stocks Debt-Free for Five Years

Those long-term returns are impressive, but the fact is that while some of those companies in our list may be debt-free now, they may not have always been so across the last five years. So the final cut is to remove companies that held any debt at any time point from the beginning of fiscal year 2006 to present day.


(GPS) - Get Report

is a one example. The stock's last full-year filing showed zero debt, but at the end of fiscal 2007 the company had $50 million in long-term debt on the books and total debt of $188 million. Again, this number may seem like chump change for a retailer with an $11 billion market cap, but "almost" doesn't count.

Trimming Gap and five others from our list --

C.H. Robinson Worldwide

(CHRW) - Get Report



(EBAY) - Get Report



(JNPR) - Get Report


Research in Motion



Texas Instruments

(TXN) - Get Report

-- our final cut of 14 debt-free stocks represent a true "debt-free index" across the last five years.

Not surprisingly, the one-year returns for this group are largely unchanged. After all, the six stocks cut from the list were debt-free in the most recent 12-month period even if they carried a balance two or three years ago. Across the last 12 months, the refined list of 14 picks tallied an average return of 30% - a jump to almost four times the broader market -- but the median one-year return remained unchanged at 17%.

On the other hand, the long-term returns soared now that the list is limited to stocks that didn't owe a dime at any point in the last five years. Specifically, the average five-year return of these 14 stocks hit a stunning 233% and the median return was almost as impressive at 82%. Remember, the broader market lost 3% as judged by the S&P's performance in the same period. Only a single debt-free stock in this group underperformed Wall Street--

Reed Elsevier


, with a -6% return over the last half-decade.

The Payoff: It Pays to Be Debt-Free

So what's to learn here -- beyond that some folks like me have way too much time on their hands to pore over financials? Well, simply put the less debt a company has the more secure it is in its future.

No shocker there. A company without debt is a company that is safely profitable and enjoying comfortable cash flows. Such a stock also can use its cash to make acquisitions, invest in product development or expansion, buy back shares or pay dividends to shareholders.

When looking for stocks to buy, investors typically look over revenue and profits pretty carefully. But if this "Debt-Free Index" is any indicator, the level of borrowing a company does is also a fairly important figure to track.

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