In this article, we will take a look at the 11 high growth low debt stocks to buy. To skip our analysis of the recent trends, and market activity, you can go directly to see the 5 High Growth Low Debt Stocks to Buy.
We have discussed high growth, low debt stocks in this article which are available at attractive prices and present promising opportunities for investment. For the purpose of our article, we have chosen EPS growth as the main factor to identify high growth stocks, from a myriad of possible metrics that could have been chosen, such as revenue growth, EBITDA growth, etc. We have defined high growth company as one where analysts expect the company to grow its EPS by an average annual rate of at least 15% over the next 5 years.
In terms of low debt, we have picked companies that have debt to equity ratios lower than 0.50. Companies typically use debt to finance their operations or to acquire assets. Utilization of debt for business purposes can help a company add value if used correctly. Incorrect usage of debt, on the other hand, has the potential to destroy value. Some companies and some industries can take on more debt than others depending on the fundamentals.
Low debt on balance sheets bodes well for the future possibility of the company remaining operational through existing financial resources as well as a comparatively greater ability to raise debt, if required, in the future at competitive rates. These companies are also better off in periods of economic downturn as they have low financial obligations to meet.
Another important factor that we have considered for our selection of stocks for this list pertains to the competitive advantage of the stocks we have picked. Competitive advantages require time to be developed and honed and require excellence ranging from product development to strategy execution and marketing and distribution.
Typically, stocks can have two kinds of competitive advantages in terms of the longevity of the advantages. Wide moat companies –likely to sustain their competitive advantage for at least the next 20 years; and narrow moat companies – more likely than not to sustain their competitive advantage for at least 10 years into the future. The Morningstar Wide Moat Focus Index is an index that focuses on companies with wide moat ratings trading at the lowest current market price, according to Morningstar Equity Research team. The index generated a total return of 22.75% in 2023 and an annual return of 13.13% during the last 10 years.
The United States stock market continues to rally with optimism related to interest rates. Investor confidence has been on an upward trajectory since the end of October following optimism about interest rates policies. On November 28, Fed Governor Christopher Waller said that he’s “increasingly confident” that the monetary policy is in the right place to bring inflation down to 2%. Major stock indices have posted consecutive weeks of positive performance with the S&P 500 slated to have one of its best months since July 2022. You can read more about the recent interest rate cuts which have led to the latest rally in the stock markets here.
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Methodology
For our list of 11 High Growth Low Debt Stocks to Buy, we chose 11 stocks with competitive advantages that have an estimated average annual EPS growth rate of over 15% a year for the next 5 years according to FINVIZ.com. We filtered the stocks based on stocks that had less than a debt to equity ratio of 0.5. EPS Next 5 Year Ratio is the estimated average annual EPS growth rate in the next 5 years.
For each stock, we have also mentioned hedge fund sentiment. Data from around 900 elite hedge funds tracked by Insider Monkey in the third quarter of 2023 was used to identify the number of hedge funds that hold stakes in each firm. Hedge funds’ top 10 consensus stock picks outperformed the S&P 500 Index by more than 140 percentage points over the last 10 years (see the details here). That’s why we pay very close attention to this often-ignored indicator.
11. Microsoft Corporation (NASDAQ:MSFT)
EPS Next 5-Year Ratio: 15.42%
Debt-to-Equity Ratio: 0.48
Number of Hedge Fund Holders: 306
Redmond, Washington-based Microsoft Corporation (NASDAQ:MSFT) is a leading technology company with products include operating systems, cross-device productivity applications, server applications, business solution applications, desktop and server management tools, software development tools, and video games. It is among the leaders in the AI race following its partnership with OpenAI, the creator of Chat GPT – an artificial intelligence powered chatbot.
In its Baron Technology Fund Q3 2023 investor letter, Baron Funds, an investment management company, made the following comments about Microsoft Corporation (NASDAQ:MSFT):
“Looking at the big picture, Microsoft continues to execute at a high level, navigating a challenging macro backdrop while aggressively investing in long-term growth, and we remain confident that Microsoft is well positioned to leverage AI over the medium to long term as it infuses Open AI and other generative AI technologies across its entire product portfolio.”
As of Q3 2023, Microsoft Corporation (NASDAQ:MSFT) ranks highest on our list of 11 high growth low debt stocks to buy in terms of hedge fund sentiment. It was the most sought-after stock among the 910 hedge funds tracked by Insider Monkey as 306 of these hedge funds held its shares valued at $72 billion.
10. Cadence Design Systems, Inc. (NASDAQ:CDNS)
EPS Next 5-Year Ratio: 17.95%
Debt-to-Equity Ratio: 0.21
Number of Hedge Fund Holders: 58
San Jose, California-based Cadence Design Systems, Inc. (NASDAQ:CDNS) is a leader in electronic systems design using its Intelligent System Design™ strategy to deliver computational software, hardware, and IP. It offers software, hardware, services, and reusable IC design blocks to its customers.
On November 2, Cadence Design Systems, Inc. (NASDAQ:CDNS) announced the new Cadence® Voltus™ InsightAI, the industry’s first generative AI technology that identifies the root cause of EM-IR drop violations early in the design process and selects and implements the most efficient fixes to improve power, performance, and area (PPA).
As of Q3 2023, 58 prominent hedge funds owned Cadence Design Systems, Inc. (NASDAQ:CDNS) shares valued at a combined total of $2.9 billion. Arrowstreet Capital was the leading hedge fund shareholder, followed by Alkeon Capital Management and Viking Global.
9. Synopsys, Inc. (NASDAQ:SNPS)
EPS Next 5-Year Ratio: 18.07%
Debt-to-Equity Ratio: 0.11
Number of Hedge Fund Holders: 57
Sunnyvale, California-based Synopsys, Inc. (NASDAQ:SNPS) is an electronic design automation company with a focus on advanced tools for silicon chip design, verification, IP integration, and application security testing.
On August 23, Synopsys, Inc. (NASDAQ:SNPS) announced the acquisition of PikeTec GmbH, a leading solutions provider for the testing and verification of automotive software for control unit systems. Terms of the transaction were not disclosed.
As of Q3 2023, Synopsys, Inc. (NASDAQ:SNPS) shares were owned by 57 hedge funds with a total value of $2.6 billion. Rajiv Jain’s GQG Partners was the largest hedge fund shareholder with ownership of 1.1 million shares valued at $511 million.
In its Q3 2023 investor letter, Aristotle Atlantic Partners, LLC, an investment advisor, made the following comments about Synopsys, Inc. (NASDAQ:SNPS):
“Synopsys contributed to performance in the quarter as the company reported third quarter revenues that were above consensus, additionally the company raised fiscal year guidance for 2023. Synopsys continues to be a key beneficiary from the demand for semiconductors throughout the entire economy, as well as the increasing complexity of semiconductor design, particularly for silicon used in the artificial intelligence (AI) technology stack. The company is also leveraging AI for its design tools which can drive increased usage and improve margins for the company’s tools.”
8. Alphabet Inc. (NASDAQ:GOOGL)
EPS Next 5-Year Ratio: 19.48%
Debt-to-Equity Ratio: 0.11
Number of Hedge Fund Holders: 221
Alphabet Inc. (NASDAQ:GOOGL), based in Mountain View, California, is the parent company of several companies including Google, Verily Life Sciences, GV (formerly Google Ventures), Calico, and X-the moonshot factory. Majority of its revenue is generated by Google Services which comprises of ads, Android, Chrome, hardware, Gmail, Google Drive, Google Maps, Google Photos, Google Play, Search, and YouTube.
On December 7, Roth MKM analyst Rohit Kulkarni raised the price target for Alphabet Inc. (NASDAQ:GOOGL) shares to $166 from $152 and maintained a ‘Buy’ rating.
This is what Wedgewood Partners, an investment management company, had to say about Alphabet Inc. (NASDAQ:GOOGL) in its Q3 2023 investor letter:
“Alphabet was a top contributor to performance as search revenues accelerated during their second quarter. This improved performance flies in the face of fears that demand for the Company’s advertising inventory and core search functionality would be diluted by the Company’s own generative-AI offerings and outside substitutes. Alphabet subsidiaries have been at the vanguard of artificial intelligence for more than a decade. The Company has spent almost $150 billion on research and development over just the past five years, and today over 80% of the Company’s advertising customers use an AI-enabled tool when they run their Google Search and YouTube campaigns. Thus, Alphabet is certainly not “behind the curve” in any way, shape, or form when it comes to AI. Quite the contrary, the Company has ample room to rationalize spending to drive better returns on investments and increase capital returns to shareholders at these relatively attractive forward earnings multiples.”
7. PDD Holdings Inc. (NASDAQ:PDD)
EPS Next 5-Year Ratio: 21.31%
Debt-to-Equity Ratio: 0.12
Number of Hedge Fund Holders: 66
Shanghai, China-based PDD Holdings Inc. (NASDAQ:PDD) is a multinational commerce group that owns and operates a portfolio of businesses. It has built a network of sourcing, logistics, and fulfillment capabilities, that support its underlying businesses. Its Pinduoduo is a mobile-only marketplace that connects millions of agricultural producers with consumers across China.
Following 94% year-over-year revenue growth in Q3 2023 to generate $9.4 billion in total revenue, Benchmark analyst Fawne Jiang raised the price target for PDD Holdings Inc. (NASDAQ:PDD) shares to $190 from $140 and maintained a ‘Buy’ rating for its shares.
As of Q3 2023, 66 of the 910 hedge funds tracked by Insider Monkey owned shares of PDD Holdings Inc. (NASDAQ:PDD), valued at $4.3 billion. Lei Zhang’s Hillhouse Capital Management holds the most shares among hedge funds, with ownership of nearly 7.4 million shares valued at $721million.
Like other stocks such as Meta Platforms, Inc. (NASDAQ:META), Microsoft Corporation (NASDAQ:MSFT), and Alphabet Inc. (NASDAQ:GOOGL), PDD Holdings Inc. (NASDAQ:PDD) is among the 11 high growth low debt stocks to buy.
6. SAP SE (NYSE:SAP)
EPS Next 5-Year Ratio: 22.20%
Debt-to-Equity Ratio: 0.25
Number of Hedge Fund Holders: 17
Walldorf, Germany-based SAP SE (NYSE:SAP) is a market leader in enterprise application software providing end-to-end suite of applications and services to business and public customers across 25 industries globally.
On October 18, SAP SE (NYSE:SAP) released its financial results for Q3 2023. Its revenues increased by 4% y-o-y to €7.7 billion while it generated an EPS of $1.14, which exceeded consensus estimates by $0.20.
As of Q3 2023, 17 of the leading hedge funds tracked by Insider Monkey owned SAP SE (NYSE:SAP) shares worth $1.1 billion. Ken Fisher’s Fisher Asset Management was the largest shareholder with ownership of 5.5 million shares valued at $711 million.
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Disclosure: None. 11 High Growth Low Debt Stocks to Buy is originally published on Insider Monkey.
