For investors looking for solid ground in an uncertain market, balance sheet is king

By Dustin Moskovitz On Mar 21, 2023

Amid ongoing market volatility and renewed fears about the health of the banking sector, investors and analysts are increasingly targeting the stocks of companies with stellar balance sheets. Eleven Club holdings stand out, with chipmaker Nvidia (NVDA) and Google parent Alphabet (GOOGL) leading the pack. “The Street doesn’t seem to realize that this market loves companies with great balance sheets and not much love for others,” Jim Cramer tweeted Monday morning. In the wake of the recent failures of Silicon Valley Bank and Signature Bank, the Club’s Big Tech holdings have stood out as bastions of stability for equity investors, in large part due to their sound balance sheets. Widening the net, we put the entire Club portfolio through the wringer Monday to identify standout balance sheets across sectors for companies that are highly-regarded by financial analysts. To make the cut, the companies had to have the following: The equivalent of a buy rating from at least two-thirds of analysts who cover the firm, according to FactSet. An Altman Z-score of at least 5, according to Bloomberg data. Note: The Altman Z-score is derived from a model initially developed in the 1960s by New York University professor Edward Altman as a way to predict bankruptcies. Today, strategists at firms like Goldman Sachs use it as a proxy for balance-sheet strength. For our purposes, the higher the number, the better. Around 3 and above is generally considered the safe zone and suggests the company’s balance sheet is in good shape. We used an Altman Z-score of 5 to focus our list on the cream of the crop. The Altman Z-score is calculated based a handful of financial metrics for each company, including its working capital in relation to tangible assets; retained earnings in relation to tangible assets; and earnings before interest and taxes (EBIT) in relation to tangible assets. Here’s all 11 stocks that passed the screen, listed from highest Altman-Z score to lowest. Notably, the Club’s two bank stocks — Wells Fargo (WFC) and Morgan Stanley (MS) — were excluded from the screen because the Altman Z-score isn’t ideal for assessing banks. Tier 1 Capital ratios are generally a better metric for monitoring the balance sheets of big banks. Breaking down the list A strong balance sheet is a sign of financial health and, in general, that’s an important quality for fundamental investors. But the market may give heightened attention to companies with strong balance sheets in times of elevated economic uncertainty. While stocks closed out Monday higher on hopes the banking crisis is easing , uncertainty persists and companies with sturdy financial footing are well-positioned to withstand whatever economic challenges may loom. GOOGL YTD mountain Alphabet’s stock performance so far in 2023. A majority of the 11 companies that cleared the bar in Monday’s screen broadly fall into the technology sector. That includes four of the Big Tech stalwarts: Alphabet, Microsoft (MSFT), Apple (APPL) and Meta Platforms (META). All four posted strong gains last week, led by Microsoft and Alphabet’s roughly 12% advances. Meta added 9%, followed by Apple, which finished 4% higher. The two other tech companies are both semiconductor names — Nvidia and Advanced Micro Devices (AMD). Both have seen their stocks soar in 2023 largely on the back of artificial intelligence (AI) reaching “an inflection point,” as Nvidia CEO Jensen Huang put it last month. Shares of Nvidia, which we think is the best way to play the AI boom, are up more than 76% year-to-date. AMD has climbed about 47% over the same stretch. Sentiment around AMD has improved this year after management indicated the downturn in its PC business appeared to be bottoming . NVDA YTD mountain Nvidia’s stock performance so far in 2023. Eli Lilly (LLY), Humana (HUM) and Danaher (DHR) are all within the health-care sector, which is traditionally seen as a defensive pocket of the market. While the three stocks are each down year-to-date, most analysts still view their respective business prospects favorably — and so does the Club. We like Eli Lilly for its best-in-class drug pipeline , Humana for its Medicare Advantage turnaround , and Danaher for its increasing focus on life sciences and high recurring revenues. The final two companies on the list are both in the retail space. Off-price retailer TJX Companies (TJX) has seen its stock price fall about 6% so far this year. However, the company’s department stores, T.J. Maxx and Marshalls, stand to gain market share from full-price retailers as inflation-weary shoppers hunt for discounts. High-end cosmetics firm Estee Lauder (EL), meanwhile, is a major beneficiary of China’s nascent economic reopening since Beijing abandoned its zero-Covid policy late last year. Shares of Estee Lauder are down about 5% year-to-date. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Google headquarters in Mountain View, California, US, on Monday, Jan. 30, 2023. Alphabet Inc. is expected to release earnings figures on February 2.

Marlena Sloss | Bloomberg | Getty Images

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