3 low-debt stocks that deliver high returns

3 low-debt stocks that deliver high returns

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Zero or low debt stocks have become popular recently because they avoid the additional financial costs associated with paying down debt. Companies without interest payments on loans have more money to return to shareholders, potentially leading to higher stock prices. This is apart from the advantage of being better insulated from market fluctuations, as there is no constant pressure on company finances. That’s why low debt is a trait that many defensive investors consider when buying stocks.

Although the Federal Reserve is expected to cut rates once or twice this year, rates are expected to remain high for a little longer, significantly higher than pre-pandemic levels. This could mean that stocks with zero debt or low debt continue to trade at a premium for an extended period of time. Analysts in this scenario focus on companies with significant cash reserves and little to no debt, which are able to sustain dividend payments even if interest rates remain high or economic difficulties arise.

Typically, highly cash-generative companies have low debt levels because there is minimal need to take on liabilities to expand. This allows some low-leverage companies to earn high returns, making them particularly suitable for the current investment climate.

Intuitive Surgery (ISRG)

3 low-debt stocks that deliver high returns

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Intuitive surgery (NASDAQ:ISRG) designs and develops robotic surgical assist systems while having no debt. As a technology-centric healthcare organization, Intuitive Surgical unveiled its newest product, the da Vinci 5 system, in April. Industry experts praised it for being groundbreaking in its field, with investors clearly welcoming these developments. ISRG shares have risen more than 26% since the start of the year to record highs, with 17% of the gains since April.

What sets Intuitive Surgical apart is its substantial financial reserves. While many tech companies are quickly tapping into cash reserves, Intuitive has $7.3 billion available even as its profits and earnings per share are up more than 50% in the past year alone. This impressive performance is reflected in Intuitive’s valuation, which trades at a relatively high price-to-earnings ratio (P/W) ratio of 76.9x. Yet it currently offers no dividends to shareholders. However, given its strong results and significant cash positions, initiating a dividend is a possibility as the company continues to expand its portfolio.

Metaplatforms (META)

This photo illustration shows the Meta logo on a smartphone and the Facebook logo in the background

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Indeed, Metaplatforms (NASDAQ:META) has invested heavily in artificial intelligence (AI). It also offers compelling advantages for investors looking for low-leverage stocks.

It generates significant cash flow, doubled earnings per share from the previous year and more than doubled free cash flow (FCF). Last year it produced $43 billion in cash, up from the previous year’s $19 billion. META’s debt-to-equity ratio was 0.123 as of June 2024, indicating that META has a low debt-to-equity ratio.

Meta Platforms started rewarding its shareholders’ trust earlier in 2024. It announced a dividend of 50 cents per share and added $50 billion to its stock buyback program. That was in addition to the more than $30 billion previously approved! In total, it has generated returns of over 70% for investors over the past twelve months. Despite these positives, META trades at a relatively reasonable price-to-earnings ratio of 29x, which is lower than the 35.5x average for the technology sector.

Cadence Design (CDNS)

A Cadence office building has a sign with the company logo on the front

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Cadence design (NASDAQ:CDNS) is a multinational technology and software company. It develops fundamental IT solutions such as printed circuit boards, radio frequency and analog signaling integration into custom integrated circuits.

This allows the company to operate in fast-growing sectors while maintaining a stable presence for many decades. For example, it recently entered into a partnership with Samsung to improve the development of AI chips. As a result, Cadence Design has a relatively low beta of 1.04, indicating that its volatility closely matches the benchmark S&P500 Table of contents. This represents a safe position for a technology company.

Moreover, CDNS is a low-leverage stock with a debt-to-equity ratio of 0.08. This means that for every dollar of equity, the company has only eight cents of debt. Even as interest rates rose, Cadence Design further reduced its debt while its stock price continued to rise, demonstrating continued improvement. Analysts remain positive about the company’s prospects, forecasting growth of five percent to reach average analyst price targets.

On the date of publication, Stavros Tousios had no positions (directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to Publication Guidelines.

Stavros Tousios, MBA, is the founder and chief analyst at Markets Untold. With expertise in currencies, macros, stock analysis and investment advice, Stavros provides investors with strategic guidance and valuable insights.

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