I write about a very large number of stocks, and one of the the things I've been noticing is that many of the companies that have had problems have a large amount of debt. In addition, I keep seeing a large number of stocks that have been performing well are debt free.
I decided to do a 'quick and dirty' analysis of debt free companies versus companies with a lot of dept. To keep things fairly consistent, I searched for stocks with price to earnings ratios below 30 and price earnings to growth ratios below 2. I then did a random selection of five stocks from each group and looked at the year-to-date returns. This is what I came up with:
High Debt
Goldman Sachs (GS) 13.7%
Morgan Stanley (MS) -21.1%
Lehman Brothers (LEH) -19.6%
Echostar (DISH) 12.3%
SLM Corp. (SLM) -19.7%
Average return -6.9%
Debt Free
Microsoft (MSFT) 14.1%
SAP (SAP) -2.5%
Texas Instruments (TXN) 11.5%
Nvidia (NVDA) 31.1%
T. Rowe Price (TROW) 35.7%
Average return 18.0%
Of course, there are companies like Apple Inc. (AAPL) which are debt free and has had a return of 117.4% year to date, but it wouldn't even be part of the pool of stocks to even randomly extract from, since its P/E of 46.35 is outside the original criteria of 30 or less.
Anyway, it looks like this analysis warrants further research.
Author owns MSFT, SAP, and AAPL.
By Fred Fuld at Stockerblog.com
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