In this article, we will take a detailed look at the 7 best debt free stocks to buy.
Debt has always been the fuel driving many companies in the equity markets. Access to cheap capital when interest rates were at all-time lows of 0.25% saw most companies in the S&P 500 bolster their balance sheet to finance various operations, including research and development and recurrent expenditure.
However, during the Federal Reserve’s meeting on July 30-31, 2024, interest rates were kept unchanged at 5.25% – 5.50%. Officials noted that inflation is nearing its target, potentially allowing for future rate cuts. “The Committee judges that the risks to achieving its employment and inflation goals continue to move into better balance,” the Federal Open Market Committee stated. Chair Jerome Powell mentioned that a rate cut could be possible in September if inflation continues to ease.
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To combat inflation, the rate was raised 11 times between March 2022 and July 2023. Amy Hubble, principal investment advisor with Radix Financial, noted, “If they cut 0.25% at a time, that’s 12 cuts over several years. So this isn’t something that’s going to happen quickly.”
The interest rates companies pay for business loans in the US vary widely based on factors like the type of loan, the lender, and the company’s creditworthiness. As of 2024, average interest rates for small business term loans range from 7.85% for fixed-rate loans to 8.79% for variable-rate loans. Online business loans can have rates from 9% to 75%, while SBA loans range from 11.50% to 16.50%. Rates can be significantly higher for businesses with poor credit.
Nevertheless, one thing that became clear after the 2008 financial crisis is that large debt loads can weigh on a company, leading to severe implications. Amid the high interest rate environment, with the US Federal Reserve hiking interest rates last year to between 5.25% and 5.50% to try and tame inflation, companies failing to meet their debt obligation increased to 153 from 85 the previous year.
Big businesses could be in trouble as the Federal Reserve reports a staggering $13.7 trillion in debt in corporate America. S&P indicates that the amount of debt companies hold has increased by 18.3% since 2020, largely due to firms taking advantage of the Federal Reserve’s move to reduce interest rates at the beginning of the pandemic.
While most people might argue that companies with zero debt are not optimizing their capital structures for growth, that’s only sometimes the case. The best debt-free stocks to buy are companies with solid balance sheets owing to their strong free cash flow generation capabilities. It also affirms the resiliency of the company’s core business to generate significant cash flow, therefore fending off the need to take up debt.
However, taking on debt is only acceptable if the business generates profits and adopts strict protocols to prevent defaulting on payments. If major corporations default on their obligations, it might lead to bankruptcy.
In the US, concerns about impending recession and an uptick in the benchmark rate resulting in higher interest payments have compelled businesses to reduce their debt levels significantly. Consequently, some companies have stood their ground, operating within their means by relying on their free cash flow instead of taking up debt.
In this case, some companies have a history of operating with low or no debt. Instead of taking up debt, they hold cash and short-term highly liquid assets to make acquisitions and finance day-to-day operations.
Therefore, the best debt-free stocks to buy belong to firms that have successfully met their financial responsibilities, making them intriguing investments for individuals seeking stability. A debt-free position indicates lower financial risk and increased financial flexibility for the organization.
The debt-to-equity ratio is a popular financial metric used to measure a company’s financial leverage. It is arrived at by dividing total liabilities by shareholders’ equity. Companies with high debt-to-equity ratios relative to the industry’s average imply they rely more on debt to finance their operations, which can be risky.
Generally, the best debt-to-equity ratio of any company looking to manage its debt load is 1 to 1.5. However, the appropriate ratio depends on various factors, including the company’s growth stage and industry sector.
In addition to the debt-to-equity ratio, it is essential to evaluate the enterprise value when analyzing the best debt-free stocks to buy. Enterprise value is arrived at by considering both the current share price (market capitalization) and the cost to pay off debt (net debt or debt minus cash)
Companies in a solid financial position tend to have a much lower enterprise value than market cap, i.e. more net cash.
Our Methodology
We meticulously reviewed the top 100 stocks from the Yahoo screener, selecting those with zero or very little debt. We compared their enterprise value (EV) to their market capitalization. We then ranked the best debt-free stocks in ascending order of their potential upside, as of August 16.
At Insider Monkey, we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
7 Best Debt Free Stocks To Buy
7. Silicon Motion Technology Corporation (NASDAQ:SIMO)
Market Cap as of 16/08/2024: $2.14 Billion
Enterprise Value: $1.93 Billion
Upside Potential: 18.12%
Based in Hong Kong, Silicon Motion Technology Corporation (NASDAQ:SIMO) stands seventh on the list of best debt-free stocks to buy owing to its solid financial position with zero debt. The technology company specializes in designing, developing, and marketing NAND flash controllers for solid-state storage devices.
Amid the growing integration of electronics and semiconductors across networking communication devices, Silicon Motion Technology Corporation (NASDAQ:SIMO) is one company well-positioned to benefit from the growth. The company delivered solid Q2 2024 results, with revenues increasing to $210.7 million from $140.4 million a year ago. Net income more than doubled to $32.5 million from $12.6 million a year ago.
The impressive results can be attributed to strong demand from PC and smartphone device makers as original equipment manufacturers (OEMs) and a significant 15% growth in revenue from its leading NAND flash client, which now accounts for more than 60% of its total earnings.
Silicon Motion Technology Corporation (NASDAQ:SIMO)’s varied range of products and leadership in technology are projected to lead to a 25-30% increase in revenue each year, with gross profit margins expected to stay between 46-47%. Increasing backlog for the company’s products indicates strong demand. There is growing demand for using the UFS 3.1 and 2.2 controllers in NAND flash. Additionally, the company is experiencing increasing demand for QLC (Quad-Level Cell) UFS products in the mainstream and entry-level 5G smartphone market.
With the core business growing at an impressive rate, analysts on Wall Street rate Silicon Motion Technology Corporation (NASDAQ:SIMO) as a ‘Buy’ with a $94.38 price target, implying an 18.12% upside potential from current levels. As of the end of Q1 2024, 46 hedge funds out of 920 tracked by Insider Monkey held stakes in the company.
6. Rambus Inc. (NASDAQ:RMBS)
Market Cap as of 16/08/2024: $5.03 Billion
Enterprise Value: $4.62 Billion
Upside Potential: 31.78%
Rambus Inc. (NASDAQ:RMBS) is a semiconductor products company that offers DDR memory interface chips and DDR4 memory interface chips to module manufacturers. It also provides a collection of security intellectual property solutions, such as crypto components, hardware foundations of security, fast protocol engines, chip distribution technologies, and patents that span memory design, rapid serial connections, and security items.
Rambus Inc. (NASDAQ:RMBS) ranks sixth on the list of best debt-free stocks to buy, given its low debt level of about $30 million. It has embarked on a new strategy of developing an industry-leading product roadmap for data centers and AI. Consequently, it is projecting a solid third quarter driven by double-digit sequential chip growth again. Revenue in the second quarter increased to $132.1 million from $119.8 million a year ago.
The company is investing strategically in new products and technologies for data centers and devices for clients, showing its belief in expanding the data center and AI sectors. Even though there has been a drop in revenues from the contract and other silicon IP sources due to sales of assets in the previous year, Rambus Inc. (NASDAQ:RMBS) anticipates a growth rate of 10% to 15% in these areas compared to the year before.
While the stock is down by 33% for the year, it trades at a price-to-earnings multiple of 20. The stock is trading at a discount, considering the average P/E in the technology sector is 31. Rambus Inc. (NASDAQ:RMBS) is currently rated as a ‘Buy’ with an average price target of $77.75, implying a 31.78% upside potential from current levels. According to Insider Monkey, the number of hedge funds holding stakes in the company dropped to 25 in Q1 2024 from 29 as of the end of 2023.
In its first quarter 2024 investor letter, Carillon Chartwell Small Cap Growth Fund stated the following regarding Rambus Inc. (NASDAQ:RMBS). Here is what the fund said:
“Rambus Inc. (NASDAQ:RMBS) shares lagged as the company disappointed investors with weak guidance for the first quarter of 2024, due to lower product revenues for the semiconductors it makes. Spending on traditional servers has been lower, replaced by AI spending, which is having a negative impact on Rambus.”
5. Symbotic Inc. (NASDAQ:SYM)
Market Cap as of 16/08/2024: $2.22 Billion
Enterprise Value: $1.35 Billion
Upside Potential: 38.78%
Symbotic Inc. (NASDAQ:SYM) is a specialty industrial machinery company that operates as a technology company developing technologies to improve operating efficiencies in warehouses. As one of the best debt-free stocks to buy, the company automates processing pallets and cases in large warehouses.
The leader in A.I.-enabled robotics technology for the supply chain delivered solid Q3 2024 results whereby revenues totaled $492 million, up from $312 million delivered last year. Symbotic Inc. (NASDAQ:SYM) also posted a net loss of $14 million, an adjusted EBITDA of $15 million, and an improvement from a net loss of $39 million and EBITDA of $3 million, affirming underlying growth.
Symbiotic has bought Veo Robotics’ assets for $8.7 million. This purchase encompasses Veo’s FreeMove® 3D depth-sensing computer vision technology for industrial workstations and associated intellectual property. By incorporating FreeMove into its warehouse automation system, Symbotic plans to improve efficiency and safety in areas where humans and robots work together.
While Symbotic Inc. (NASDAQ:SYM) is down by about 46% for the year with a low debt of $18.18 million, it continues to fire on all angles while relying on operational efficiency. Additionally, the stock is rated as ‘Buy’ on Wall Street with an average price target of $55, implying a 38.78% upside potential from current levels. A total of 24 hedge funds out of the 920 tracked by Insider Monkey held stakes in Symbotic Inc. (NASDAQ:SYM) as of the end of the first quarter.
4. VTEX (NYSE:VTEX)
Market Cap as of 16/08/2024: $1.36 Billion
Enterprise Value: $1.15 Billion
Upside Potential: 60.35%
VTEX (NYSE:VTEX) is a technology company that provides software as a service digital commerce platform for enterprise brands and retailers. It offers a platform that allows customers to execute their commerce strategy in online stores. It stands fourth on our list of best debt-free stocks to buy, given its low debt level of about $3 million.
VTEX (NYSE:VTEX) is already up by about 7% for the year, with an enterprise value of about $1.15 billion, a market cap of about $1.36 billion, and a small debt of $3.08 million. The rally comes at the backdrop of the company delivering solid Q2 results, where revenues were up 18% yearly to $56.50 million, beating estimates of $56.45 million. Earnings came in at $0.03 a share compared to a loss of $0.04 a share delivered a year ago.
VTEX (NYSE:VTEX) continues to see strong sales momentum in welcoming new customers in Australia, Brazil, Mexico, Portugal, and the US, among other countries. VTEX’s growth strategy is progressing by eight straight quarters of year-over-year operating margin growth in the double digits while maintaining a fast-paced growth trajectory. The VTEX Platform’s global competitive standing is strengthened amid product lineup improvements.
The average price target on the stock is $11, implying a 60.35% upside potential from current trading levels. According to Insider Monkey, 11 hedge funds out of 920 tracked held stakes in VTEX (NYSE:VTEX) as of the end of Q1 2024.
3. Udemy, Inc. (NASDAQ:UDMY)
Market Cap as of 16/08/2024: $1.13 Billion
Enterprise Value: $721.38 Million
Upside Potential: 82.84%
Udemy, Inc. (NASDAQ:UDMY) is one of the best debt-free stocks in the consumer defensive sector. The company operates a marketplace, a platform for learning skills. It offers skill acquisition development and validation courses for people through direct-to-consumer. Udemy, Inc. (NASDAQ:UDMY) also boasts of a low debt portfolio of about $6.9 million as of the end of last year.
The company benefits from a shift to online education after the COVID-19 pandemic, which affirms its growth metrics and long-term prospects. Udemy, Inc. (NASDAQ:UDMY) ‘s two-sided marketplace and flywheel also give it a competitive edge against its peers in the online education segment.
In Q2 2024, the company delivered a 9% year-over-year increase in revenue to $194.4 million, driven by a 17% increase in annual recurring revenue to $492.6 million. To seize significant market opportunity, Udemy, Inc. (NASDAQ:UDMY) is boldly directing its strategy and resources towards the most promising large enterprise market, aiming for rapid profitability.
Udemy anticipates achieving at least $25 million in yearly cost reductions by improving operational efficiency and projecting Adjusted EBITDA between $130 and $150 million for 2026.
While Udemy, Inc. (NASDAQ:UDMY) is currently down by about 40% with an enterprise value of $643 million and a $1.05 billion market, it is rated as a Buy with a $13 price target, implying an 82.84% upside potential from current levels. As of the end of the first quarter, 16 out of 920 hedge funds tracked by the Insider Monkey database held stakes in the company from 22 as of the end of 2023.
2. Prothena Corporation plc (NASDAQ:PRTA)
Market Cap as of 16/08/2024: $1.12 Billion
Enterprise Value: $572.00 Million
Upside Potential: 185.84%
Prothena Corporation plc (NASDAQ:PRTA) is a clinical biotechnology firm specializing in discovering new treatments for illnesses linked to problems with protein dysregulation. The firm is engaged in advancing birtamimab, an experimental humanized antibody currently in its third phase of clinical trials for the cure of AL amyloidosis; Prasinezumab, a humanized monoclonal antibody, aimed at treating Parkinson’s disease and other associated synucleinopathies.
Prothena Corporation plc (NASDAQ:PRTA)’s emphasis on developing new treatments for neurodegenerative illnesses such as Alzheimer’s has captured the attention of both investors and experts. The advancement and potential achievements of Prothena’s pipeline initiatives are diligently watched, as favorable outcomes might result in significant breakthroughs in treating these difficult diseases. Analysts at RBC Capital have shared their conviction that there could be substantial benefits if the pipeline initiatives are successful.
Prothena Corporation plc (NASDAQ:PRTA) reported earnings per share of $1.22, beating the consensus estimate of a loss of $1.01 a share. Higher revenues drove the earnings beat. Revenues totaled $132 million, above estimates of $22 million and a significant improvement from $4 million in the year-ago quarter. The company ranks second on our list of best debt-free stocks to buy. It also had a low debt level of about $12.12 million as of the end of last year.
Prothena Corporation plc (NASDAQ:PRTA) is increasingly becoming one of the best debt-free stocks to buy, having inked a strategic collaboration with Bristol Myers worth $80 million for PRX012, a wholly-owned potential best-in-class, next-generation antibody.
While Prothena Corporation plc (NASDAQ:PRTA) is down by about 50% for the year, analysts on Wall Street remain upbeat about the stocks’ long-term prospects given its pipeline of drugs that affirm long-term prospects. The average price target on the stock is $69.83, which implies a 185.84% upside potential from current levels. 15 out of 920 hedge funds tracked by the Insider Monkey database held stakes in the company as of the end of Q1 2024.
1. Cassava Sciences Inc (NASDAQ:SAVA)
Market Cap as of 16/08/2024: $1.36 Billion
Enterprise Value: $1.24 Billion
Upside Potential: 617.16%
Cassava Sciences Inc (NASDAQ:SAVA) is one of the best debt-free stocks to buy to gain exposure in the healthcare sector. It operates as a clinical-stage biotechnology company developing drugs for neurodegenerative diseases. Its lead product is Simufilam, a small molecule drug for detecting Alzheimer’s disease.
While Cassava Sciences Inc (NASDAQ:SAVA) is flat for the year, it more than doubled in value in June before experiencing a deep pullback. The stock rallied by over 30% after Chief Executive Officer Rick Barry issued a positive open letter signaling positive phase 2 results for its experimental Alzheimer’s disease drug Simufilam.
The deep pullback came on Hoau-Yan Wang, a former consultant to Cassava Sciences Inc (NASDAQ:SAVA), being indicted on fraud-related applications made on the experimental drug. The company has already refuted any wrongdoing.
Cassava Sciences Inc.’s (NASDAQ:SAVA) debt level stood at about $14.19 million as of the end of last year. The company also boasts an enterprise value of $935.78 million with a market cap of $1.06 billion.
Analysts on Wall Street rate Cassava Sciences Inc (NASDAQ:SAVA) as a ‘Moderate Buy’ with a $107 price target, implying a 617.16%upside potential from current levels. Insider Monkey database indicates that 6 out of the 920 hedge funds tracked held stakes in the company as of the end of Q1 2024.
The best debt-free stocks to buy offer some of the best investment opportunities owing to their financial stability and significant upside potential. However, given that the artificial intelligence arms race is just starting, under-the-radar A.I. stocks are trading at highly discounted valuations with incredible promise for anyone looking to diversify their portfolio. If you are looking for an A.I. stock that is more promising than the top activist investment plays, check out our report about the cheapest AI stock.
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