5 Stocks to Thrive as Debt Bubble Nears

Given that rising interest rates will increase costs for highly leveraged companies, rivals with large cash reserves and low debt loads are better-positioned for future profitability. Since the 2008–09 financial crisis, U.S. companies have added a staggering $14 trillion of obligations to their balance sheets, per Bank of America Merrill Lynch, and total debt incurred by firms outside the financial sector is now a record 74% of GDP, having grown faster than earnings, according to Moody's Investors Service, as reported by Barron's. Scott Minerd, global chief investment officer (CIO) at Guggenheim Partners, has warned that rising rates could touch off a wave of corporate defaults. (For more, see also: Stocks On 'Collision Course With Disaster,' Face 40% Drop.)

Meanwhile, Barron's indicates that these five companies offer steady, sustainable cash flows that are allowing them to service their debt comfortably, or even to reduce it:

Source: Barron's, published June 26.

Goldman's Research

Goldman Sachs Group Inc. (GS) finds that stocks with strong balance sheets have been delivering significant outperformance in 2018 that is likely to continue into the future. Through June 7, their basket beat the S&P 500 Index (SPX) by eight percentage points year to date. Investopedia has looked at their report in a two-part set of articles. In addition to MasterCard and Electronic Arts, big outperformers in Goldman's basket also include software publisher Adobe Systems Inc. (ADBE), dental care company Align Technology Inc. (ALGN), oil refiner Valero Energy Corp. (VLO) and robotic surgery company Intuitive Surgical Inc. (ISRG). (For more, see also: 8 Stocks That Are Crushing the S&P 500.)

Mastercard

The payments processor has a cash hoard of $8.8 billion and its ratio of debt to EBITDA is only 0.7, per Barron's. Revenues are growing briskly as consumers increasingly prefer to pay with plastic rather than cash, with projected growth rates of 20% in 2018 and 12% in 2019, per Yahoo Finance, which also indicates that operating cash flow equals more than 90% of total debt.

Electronic Arts

Both Goldman and Barron's note that technology companies are prominent among those with the strongest balance sheets. With Electronic Arts, Barron's indicates that it is encumbered by little in the way of fixed assets or inventory, is sitting on more than $5 billion of cash, and saw its free cash flow rise to $1.6 billion in its most recent fiscal year, up by 26%. Per Yahoo Finance, debt is less than 60% of operating cash flow, while projected sales growth for the current fiscal year (fiscal 2019) is 8% and that for next year is just under 7%. Moving to delivery of game software over the internet as its preferred sales model, and away from sales of physical game disks, has both cut costs and enhanced revenues.