In this article, we take a look at 11 best debt free stocks to buy.
Debt free stocks have more cash than they do debt.
The truly debt free profitable companies have more flexibility than similar companies that have a lot of debt.
Interest rates have increased substantially in 2022 and it’s likely they will increase further in 2023. With higher interest rates, stocks with a lot of debt have more interest payments if their debt is variable.
Debt free companies don’t have to pay the interest payments on the debt.
Debt free profitable companies can also issue some debt if they need to, giving management some potential capital for growth or other uses. Companies can take on a certain level of debt depending on their EBITDA. Some companies with relatively stable and predictable cash flows can take on more debt than other companies with less stable and predictable cash flows. The amount of debt a company can take on is also affected by where the economy is in the economic cycle. If the economy is in a more uncertain period, companies may not be able to take on as much debt as if the economy were in an expansionary phase.
For those of you interested check out 10 High Growth Low Debt Stocks to Buy.
Economic Cycle
Currently, it isn’t clear where the economy is in the economic cycle. While unemployment is low and the U.S. economy is expanding, the Federal Reserve is raising interest rates.
Furthermore, there has been a recent bank failure.
On March 9 and March 10, the S&P 500 fell on both days given Silicon Valley Bank’s troubles which led to the FDIC to close the bank on Friday. Previously, Silicon Valley Bank was the 16th largest bank in the United States that served numerous Silicon Valley companies and startups.
After the collapse, the White House said economic reforms after the Great Recession will help mitigate the systemic risk as a result of Silicon Valley Bank’s failure.
Chair of the White House Council of Economic Advisers Cecilia Rouse said, “Our banking system is in a fundamentally different place than it was, you know, a decade ago. The reforms that were put in place back then really provide the kind of resilience that we’d like to see.”
Nevertheless, the market is more cautious now than before as investors watch for any signs of broader financial contagion.
One main reason why Silicon Valley Bank failed was the substantially higher interest rates which the bank was not well positioned to handle. Given the Federal Reserve will likely increase interest rates even further this year, there could be more stress on the financial system that will have to also deal with Silicon Valley Bank’s failure and also potentially an economic slowdown.
In this time of uncertainty, owning quality companies with more financial flexibility and competitive advantages could be less risky than owning similar companies with a lot of debt.
Given all the uncertainties, it could be a good idea for long term investors to own a well diversified portfolio of leading blue chip companies across many different sectors.
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Methodology
For our list of 11 Best Debt Free Stocks to Buy, we selected 11 stocks with competitive advantages that either have a debt to equity ratio of 0 according to FINVIZ.com or that essentially have no net debt given their enterprise value is lower than their market capitalization.
There are different definitions of enterprise value so under some calculations, some of the companies on our list could potentially be considered as having some debt. Nevertheless, generally, the companies on this list are basically net debt free.
We ranked each stock based on the number of hedge funds in our database of 943 funds that owned shares of the same stock at the end of Q4.
For those of you interested check out 10 High Growth AI Stocks to Buy.
11 Best Debt Free Stocks to Buy
11. T. Rowe Price Group, Inc. (NASDAQ:TROW)
Number of Hedge Fund Holders: 29
T. Rowe Price Group, Inc. (NASDAQ:TROW) is a leading investment manager that has a debt to equity ratio of 0 according to FINVIZ.com. As of February 28, the company had preliminary AUM of $1.31 trillion, down slightly from preliminary AUM of $1.35 trillion at January 31. On Friday, shares of T. Rowe Price Group, Inc. also fell along with many other leading financial stocks given the FDIC closed down Silicon Valley Bank.
Given the near term uncertainty as a result of interest rate increases, a potential economic slowdown, and the recent closure of Silicon Valley Bank, T. Rowe Price Group, Inc. could have more downside in the near term. Nevertheless, T. Rowe Price Group, Inc. has a quality business that could benefit if the broader market grows in the long term which could mean more revenue from more AUM. As of March 10, shares trade for a forward P/E ratio of 14.39 and have a dividend yield of 4.65%.
Alongside Alphabet Inc. (NASDAQ:GOOG), Meta Platforms, Inc. (NASDAQ:META), and Microsoft Corporation (NASDAQ:MSFT), T. Rowe Price Group, Inc. is a net debt free stock that’s owned by many hedge funds in our database at the end of Q4.
10. Chipotle Mexican Grill, Inc. (NYSE:CMG)
Number of Hedge Fund Holders: 42
Chipotle Mexican Grill, Inc. (NYSE:CMG) is a leading Mexican burrito restaurant chain that has a debt to equity ratio of 0 according to FINVIZ.com. Given Chipotle Mexican Grill, Inc. also doesn’t franchise and the company has more global expansion opportunities, the company arguably has more flexibility than many other restaurant chains. That being said, Chipotle Mexican Grill, Inc. has a forward P/E ratio of 30.36 which is a fairly premium valuation for the company. If the economy slows, Chipotle Mexican Grill, Inc. could have downside in the near term. In the long term, however, the company has potential given it could increase the number of its store locations fairly significantly.
9. Electronic Arts Inc. (NASDAQ:EA)
Number of Hedge Fund Holders: 46
Electronic Arts Inc. (NASDAQ:EA) ranks #9 on our list of 11 Best Debt Free Stocks to Buy given 46 hedge funds in our database of 943 funds owned shares at the end of Q4. In addition to having a relatively strong balance sheet, the leading gaming maker also repurchased 2.6 million shares of $325 million during its quarter ended December 31, 2022 and Electronic Arts Inc. paid a cash dividend of $0.19 per share as well. In the long term, Electronic Arts Inc. could potentially have growth opportunities in the metaverse given its substantial portfolio of popular games. For those of you interested, check out 10 Most Promising Metaverse Stocks to Buy.
8. Paychex, Inc. (NASDAQ:PAYX)
Number of Hedge Fund Holders: 47
Paychex, Inc. (NASDAQ:PAYX) is a leading payroll service provider that has a strong balance sheet. As of November 30, 2022, the company had cash, restricted cash, and total corporate investments of $1.3 billion and short-term and long-term borrowings, net of debt issuance costs of $808 million. For the quarter ended November 30, 2022, Paychex, Inc.’s total sales rose 7% year over year to $1.19 billion and the company’s adjusted diluted earnings per share increased 9% year over year to $0.99. As of March 10, Paychex, Inc. has a forward P/E ratio of 23.79 and a dividend yield of 2.93%.
7. BlackRock, Inc. (NYSE:BLK)
Number of Hedge Fund Holders: 49
BlackRock, Inc. (NYSE:BLK) is a leading asset manager with a debt to equity ratio of 0 according to FINVIZ.com. Like many other leading financial stocks, shares of BlackRock, Inc. declined on Friday given the financial sector headwinds as a result of the recent closure of Silicon Valley Bank. Currently, it isn’t clear what the exact effect the closure will have on the financial system. If there is an economic slowdown and broader market weakness as a result of the closure and more Federal Reserve interest rate increases, BlackRock, Inc.’s AUM could come under further pressure. Nevertheless, BlackRock, Inc. has long term growth potential if the broader market recovers in the long term. 49 hedge funds in our database owned shares of BlackRock, Inc. at the end of Q4, ranking the stock #7 on our list of 11 Best Debt Free Stocks to Buy.
6. Deckers Outdoor Corporation (NYSE:DECK)
Number of Hedge Fund Holders: 51
Deckers Outdoor Corporation (NYSE:DECK) is a footwear, apparel, and accessories maker that has a debt to equity ratio of 0 according to FINVIZ.com. Given it is a consumer cyclical, demand for Deckers Outdoor Corporation’s products could potentially slow if the economy slows in the near term. As a result, the company could have near term downside. In the long term, however, analysts expect EPS growth for Deckers Outdoor Corporation. Specifically, they expect earnings of $18.54 per share for FY2023, $21.85 per share for FY2024, and $25.85 for FY2025. For FY2022, analysts expected earnings of $15.06 per share.
Like Deckers Outdoor Corporation, Alphabet Inc., Meta Platforms, Inc., and Microsoft Corporation are net debt free stocks that are owned by many hedge funds in our database at the end of Q4.
5. ASML Holding N.V. (NASDAQ:ASML)
Number of Hedge Fund Holders: 59
ASML Holding N.V. (NASDAQ:ASML) ranks #5 on our list of 11 Best Debt Free Stocks to Buy given 59 hedge funds in our database owned shares of the leading semiconductor equipment producer at the end of Q4. In terms of its balance sheet, ASML Holding N.V. has a debt to equity ratio of 0 according to FINVIZ.com and the company ended fourth quarter 2022 with cash, cash equivalents and short-term investments of €7.4 billion. At the end of 2022, ASML Holding N.V. had a backlog of €40.4 billion, an increase of 67% versus the end of 2021, giving the company substantial business in the future.
4. Advanced Micro Devices, Inc. (NASDAQ:AMD)
Number of Hedge Fund Holders: 97
Advanced Micro Devices, Inc. (NASDAQ:AMD) is a leading semiconductor maker with a strong balance sheet given it had no net debt at the end of Q4 2022. At the end of the fourth quarter, in fact, Advanced Micro Devices, Inc. had cash, cash equivalents and short-term investments of $5.9 billion at the end of the quarter. The company also said it had a total debt of $2.467 billion as of December 31, 2022 although the definition of total debt is different for different companies. While the market expects Advanced Micro Devices, Inc. to grow in the long term, the company is arguably one of the riskier stocks on our list if the big tech companies produce their own semiconductor chips in a meaningful way. As a result, Advanced Micro Devices, Inc. could have downside if it doesn’t gain the market share that the market expects in the future.
3. Alphabet Inc. (NASDAQ:GOOG)
Number of Hedge Fund Holders: 152
Alphabet Inc. is another potentially risky stock on our list with potential downside if it doesn’t adjust well enough given the change in the search market. Although its AI still makes mistakes, Microsoft’s AI powered Bing search could potentially gain market share and also increase processing costs for Google. As far as balance sheets go, however, Alphabet Inc. had substantially more total cash, cash equivalents, and marketable securities than debt, giving the company financial flexibility for more investment in AI. As of March 10, Alphabet Inc. has a forward P/E ratio of 14.94.
2. Meta Platforms, Inc. (NASDAQ:META)
Number of Hedge Fund Holders: 194
Meta Platforms, Inc. is a big tech company with a fortress balance sheet with no net debt. In fact, the social media giant repurchased $27.93 billion of its stock for full year 2022, ranking the company among the biggest stock repurchasers in the world for last year. While Meta Platforms, Inc. issues shares for stock based compensation, the company’s buybacks could help the stock in the long term if they exceed the number of new shares issued and the company’s earnings rise. In the long term, Meta Platforms, Inc. could benefit from the growth in the metaverse if it is a success.
194 hedge funds in our database owned shares of Meta Platforms, Inc. at the end of Q4, ranking the stock #2 on our list of 11 Best Debt Free Stocks to Buy.
1. Microsoft Corporation (NASDAQ:MSFT)
Number of Hedge Fund Holders: 259
Microsoft Corporation is a big tech company with no net debt. While it isn’t clear how much Microsoft Corporation has in overseas cash and hence how much the company might have to pay to repatriate its overseas cash, the company’s strong free cash flow generation would likely cover any net debt in a few years if management decided to do so. As far as capital returns, Microsoft Corporation has raised its annual dividend for 20 consecutive years, indicating that the company has generated substantial excess capital in the past. With its cloud and enterprise growth, the company could have more excess capital in the future as well.
259 hedge funds in our database owned shares of Microsoft Corporation at the end of Q4, ranking the stock #1 on our list of 11 Best Debt Free Stocks to Buy.
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