The Power of Financial Strength: Why Companies Need More Than Just Earnings to Succeed

1. The Importance of Financial Strength inInvesting

The phrase “Winning isn’t everything. It’s the only thing,” famously coined by football coach Vince Lombardi, has inspired many to prioritize success above all else. For Investors, this mindset often translates to focusing solely on a company’s earnings. However, this approach is narrow and overlooks a critical factor: financial strength. A company’s ability to navigate unexpected challenges or capitalize on opportunities is just as important as its profitability. This is why the concept of a “Balance Sheet Powerhouse” is essential in evaluating companies. These are businesses that not only generate strong earnings but also maintain a robust financial foundation, making them resilient and adaptable in an ever-changing market landscape.

2. How Companies Qualify for the Balance Sheet Powerhouse List

Every year, a select group of companies earns a spot on the Balance Sheet Powerhouse list, a prestigious recognition of their financial health. To qualify, companies must meet a stringent set of criteria. First, they must have a market value of at least $5 billion, indicating a level of scale and stability. Second, their debt must not exceed 10% of their net worth, showcasing their ability to manage liabilities without over-leveraging. Additionally, they must be based in the U.S., ensuring a level of regulatory and economic stability. Furthermore, their current assets must be at least twice their current liabilities, demonstrating strong liquidity. Finally, they must report earnings of at least 20 cents per share, ensuring profitability. This year, 49 companies met these rigorous standards, making it the second-highest number of qualifiers to date.

3. My Top Stock Picks from the Balance Sheet Powerhouse List

While making the Balance Sheet Powerhouse list is an achievement in itself, not all of these companies are necessarily “buys” for investors. Many of them may already be trading at high valuations relative to their fundamentals, making them less attractive for immediate investment. However, every year, a few standouts emerge that are worth considering. This year, I’ve identified five companies from the list that deserve a closer look.

Cal-Maine Foods Inc. (CALM): As the largest U.S. egg producer, Cal-Maine Foods is currently riding a wave of soaring egg prices. While this makes the stock a bit risky, the company has a history of stability and offers a rich dividend yield, making it a worthwhile hold through market ups and downs.

First Solar Inc. (FSLR): As the leading American manufacturer of solar panels in a market dominated by Chinese companies, First Solar stands to benefit from a potential U.S.-China trade war. Tariffs on Chinese solar panels could give First Solar a significant competitive advantage.

Gentex Corp. (GNTX): Gentex, known for its self-dimming car mirrors, trades at just 14 times earnings, a bargain compared to the overall market’s multiple of around 24. The company has also demonstrated steady revenue growth of about 7% annually, with an impressive 11% jump in earnings last year.

Mueller Industries Inc. (MLI): Based in Tennessee, Mueller Industries manufactures a wide range of metal and plastic products. It has consistently delivered a return on equity (ROE) of over 15% for seven consecutive years, a testament to its strong profitability. This is a repeat recommendation, highlighting its continued financial health.

NEXTracker Inc. (NXT): NEXTracker produces equipment that allows large solar installations to track the sun’s movement, maximizing energy production. While 22 out of 28 analysts covering the stock recommend it—making it a Wall Street favorite—the stock still shows promise despite the potential risks of being an analyst darling.

4. Companies with Consistent Excellence: The Medal Winners

While not all companies on the Balance Sheet Powerhouse list are immediate investment opportunities, some have consistently demonstrated financial excellence over the years. These “medal winners” have earned their place on the list nine times or more, showcasing their long-term financial strength and stability.

Dolby Laboratories Inc. (DLB): A leader in audio equipment, Dolby Laboratories has made the Balance Sheet Powerhouse list an impressive 14 times, including nine consecutive years. This consistent performance underscores its financial resilience and operational excellence.

Gentex Corp. (GNTX): With 13 appearances on the list, Gentex is another standout. Its strong revenue growth and attractive valuation make it a notable mention, as highlighted earlier.

SEI Investments Co. (SEI): An investment consultant providing services to portfolio managers, SEI Investments has been recognized 12 times on the list.

Intuitive Surgical Inc. (ISRG): Known for its Robotic Surgical Systems, Intuitive Surgical has made the list 11 times, demonstrating its ability to maintain financial health while innovating in its field.

Arista Networks Inc. (ANET) and Cognizant Technology Solutions Corp. (CTSH): Both companies have been recognized nine times, rounding out the list of consistent performers.

5. New Additions to the Balance Sheet Powerhouse List

The Balance Sheet Powerhouse list also welcomes newcomers each year, showcasing companies that have recently met the stringent criteria. This year, 12 new companies have been added to the list, including:

• AAON Inc. (AAON): A manufacturer of heating and cooling products.
• AppFolio Inc. (APPF): A provider of cloud-based business management solutions.
• Badger Meter Inc. (BMI): Known for its flow measurement and control products.
• Champion Homes Inc. (SKY): A leading producer of manufactured homes.
• Concept Therapeutics Inc. (CORT): A clinical-stage biopharmaceutical company.
• Duolingo Inc. (DUOL): A popular language-learning platform.
• FTI Consulting (FCN): A global business advisory firm.
• Hims & Hers Health Inc. (HIMS): A telehealth and consumer health company.
• Maplebear Inc. (CART): A company focused on last-mile delivery solutions.
• NEXTracker Inc. (NXT): Already highlighted earlier, NEXTracker also makes its debut on the list this year.
• Royal Gold Inc. (RGLD): A precious metals streaming and royalty company.
• Synopsis Inc. (SNPS): A leader in electronic design automation.

These newcomers bring fresh perspectives and strong financial fundamentals to the table, making them worth watching in the years to come.

6. The Track Record and Conclusion

The Balance Sheet Powerhouse list has a strong track record of identifying companies with financial strength, many of which have delivered solid returns for investors. Over the past 20 years, the average one-year return of the recommended stocks has been 14.1%, outperforming the Standard & Poor’s 500 Total Return Index, which has averaged 10.8% over the same period. Importantly, 13 out of 20 recommendations have been profitable, and nine have beaten the index.

For instance, last year’s recommendations—Mueller Industries, T. Rowe Price Group Inc. (TROW), and Alphabet Inc. (GOOGL)—delivered impressive returns of 62%, 26%, and 5%, respectively. Combined, these picks returned 30.9%, compared to the S&P 500’s 21.6%.

It’s important to note that past performance is not a guarantee of future results, and individual investment decisions should be based on a thorough analysis of each company’s specific circumstances. Additionally, the results presented are hypothetical and should not be confused with the performance of the author’s personal or client accounts.

In conclusion, while earnings are an important metric for investors, they are not the only factor. A company’s financial strength, as demonstrated by its balance sheet health, is equally crucial in determining its long-term success. The Balance Sheet Powerhouse list highlights companies that have achieved this balance, offering investors a valuable starting point for further research. As with any investment, it’s essential to approach these opportunities with caution, considering both the potential rewards and the associated risks.

This summary offers a comprehensive overview of the Balance Sheet Powerhouse list, its criteria, standout companies, and historical performance, providing readers with a clear understanding of why financial strength matters in investing.