Finding Comfort Outside Of The MegaTechs

Just five stocks have accounted for 25% of the gain for the Standard & Poor’s 500 since the March 23 low: Facebook, Apple AAPL , Amazon AMZN , Microsoft MSFT , and Google. Some features that all of these companies share are a rock-solid balance sheet, gobs of cash, limited debt, and in some cases, a commitment to growing dividends and buybacks. 

If you are over-allocated to mega techs, want the growth tech can offer, and backed by solid balance sheets, here are five stocks to consider. Next week, I’ll present five more.  

PayPal PYPL may be the ultimate fintech company. But unlike disruptive start-ups, PayPal is addressing fintech opportunities with more than $10 billion in cash, a 22-year track record and deep, well-worn relationships with major retailers and financial institutions. 

COVID-19 presents risks to PayPal, and its first-quarter performance reflected this. People without jobs are not transferring money as frequently, and they are buying fewer goods and services. But on the upside, digital transactions are gaining preference over dollars and coins for their public health benefits. As validation of this, on May 1, PayPal recorded the highest number of daily transactions in its history. 

Understanding the strength of PayPal’s balance sheet requires a closer look at the notes to the financial statements. The “other” category of liabilities contains a massive entry of $26 billion in 2019, which dwarfs the company’s cash on hand. However, a closer read reveals this sum is largely money PayPal has received from payors, but has not yet been sent to payees. Netting this out, shows PayPal has current assets of more than 50 times its current liabilities, a nearly unassailable position. 

Cognex makes machine vision systems/sensors and barcode readers used in factories and distribution centers. There are several factors that might influence how the COVID-19 virus may affect Cognex. Tech spending seem strong, but expansion of new factories and distribution facilities, the bread and butter for Cognex, may wane. The strength of the company’s balance sheet stems from the fact the company has no debt. Further, with some $400 million in cash, Cognex has about five times more cash than current liabilities, i.e, obligations due in the coming year. 

The company pays a modest dividend — about 0.40% — but it has more than doubled since 2016. With a payout ratio at approximately 21%, the dividend appears safe too. 

Fortinet. No matter what is happening in the world, companies are generally not pulling back on data and cyber security, which should offer a vote of confidence in Fortinet’s income statement. In support of this idea, the company has doubled its top line since 2015. But true comfort may be provided by the company’s balance sheet. The company’s founder and CEO, serial entrepreneur, Ken Xie, a Stanford electrical engineer, doesn’t seem to believe in debt, and there has been none on the company’s balance sheet since at least 2009. 

At $1.9 billion, Fortinet doesn’t have the embarrassing horde of cash as Microsoft (cash > $100 billion), but on a relative basis it does. Its’ $1.9 billion constitutes 80% of the company’s total assets, versus Microsoft’s cash position, which represents about 77% of its current assets. This leads to some confidence-boosting balance sheet metrics. For instance, current assets are about 20 times current liabilities, meaning that net of its modest capex, Fortinet can keep its lights on for years to come.  

Jack Henry & Associates. If you hear about a trend toward tech in sourcing, it might undermine your confidence in Jack Henry Associates, which provides soup to nuts tech services to thousands of banks and credit unions. True, banks and credit unions might pull in their horns over the coming months, but the longterm trend in banking is to outsource this critical and increasing complex function.  

And if banks slow-walk the company’s payables, Jack Henry can weather this kind of storm because it has no debt on its balance sheet, and healthy cash flow per share of $5.30 against capex of less than $1.00 per share. Further, Jack Henry has nearly doubled its dividend since 2015, but maintains a respectable dividend payout ratio of approximately 40%. 

ServiceNow NOW , which develops cloud-based workflow and productivity tools for larger enterprises, was on a tear in sales and earnings growth well before COVID-19 rattled the workplace. Now, remote workforces may provide an important tailwind for the company. But should the economy’s fortunes go south with a tepid or lumpy recovery, ServiceNow has the balance sheet strength to arrive on the other side of the turmoil. 

At first glance, this is not intuitively obvious, as ServiceNow sports a massive deferred revenue $2.7 billion liability, greater than its cash of $1.7 billion and nearly equal to its current assets. However, deferred revenue, which is revenue booked, but not yet earned, is a non-cash liability. That is, as each month passes, subscriptions and licenses are whittled down, and this liability dissipates. It never goes to zero, and shareholders should not want it to, as deferred revenue liabilities should be replaced by new deferred revenues from renewals and new contracts. 

Removing the non-cash deferred revenue liability shows ServiceNow has about $1.7 billion in cash on hand to take care of just $53 million in accounts payable for a coverage ratio of 32x. The solid balance sheet positioned needs to be tempered somewhat by ServiceNow’s relative youth. The company was founded in 2003 and was cashflow positive for the first time in 2019.