Companies that Have Done What Congress Won't

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The U.S. debt ceiling talks are sputtering along, with the deadline for addressing the country's dwindling amount of available credit fast approaching and legislators bickering over how to address the problem.

By all accounts, the process has been painfully slow, with both sides proving to be better at political posturing than at legitimate compromise.

Perhaps they could learn something from Corporate America. While a myriad of companies went into the financial crisis of 2008 leveraged to the hilt, many have used the last three years to chip away at -- or, in some cases, altogether eliminate -- their high piles of debt. To be sure, they didn't have to deal with the same sort of political machinations that U.S. policymakers have to deal with. But they can nonetheless provide a bit of much-needed "get-it-done" inspiration -- not to mention good opportunities for investors.

In fact, in the decade-plus that I've been researching history's most successful investment strategies, the variable that has most often popped up is debt. Gurus like Peter Lynch, Warren Buffett, and Benjamin Graham all have used approaches that look for companies that don't stretch themselves too thin. With that in mind, I recently looked for companies that have lowered their debt load over the past three years -- and which also get high marks from my "Guru Strategies". The models are each based on the approach of a different investing great, including Lynch, Buffett, and Graham. I found about 20 firms that make the grade; here's a look at some of the best of the bunch.

USANA Health Sciences ( USNA ): Utah-based USANA ($440 million market cap) makes nutritional and personal care products that it sells to customers in the U.S., Canada, Australia, New Zealand, Mexico, the U.K., and a number of countries in Asia. Its subsidiary, BabyCare, Ltd., has a direct selling business in China.

USANA, which is a Federal Drug Administration-registered firm, has decreased its long-term debt/equity ratio from 110% three years ago to zero today, and it gets approval from my Warren Buffett- and Joel Greenblatt-based models. The Buffett approach looks for firms with a decade-long history of upping earnings per share; enough annual earnings that they could, if need be, use those earnings to pay off all long-term debt in less than five years; and high returns on equity (a sign of the "durable competitive advantage" Buffett is known to seek). USANA delivers on all fronts, having upped EPS in all but one year of the past decade, no long-term debt, and a 10-year average ROE of 35.2%, which more than doubles the model's 15% target.

The Greenblatt-based model, meanwhile, likes USANA's solid 17.1% earnings yield and 74.5% return on capital. It sees the stock as the 18th-most-attractive in the entire market right now.

Rock-Tenn Company ( RKT ): Based in Georgia, Rock-Tenn makes paperboard, containerboard, consumer and corrugated packaging, and merchandising displays. It operates over 245 facilities in the U.S., Canada, Mexico, Chile, Argentina and China. The $2.4-billion-market-cap firm has done a nice job of reducing a high debt load over the past three years, with long-term debt/equity declining from 227% to 89%.

Rock-Tenn gets approval from my James O'Shaughnessy-based growth model. This approach looks for companies that have upped EPS in each year of the past half-decade (without regard to magnitude), which Rock-Tenn has done. And its shares look cheap, trading for just 0.78 times sales, easily coming in under this model's 1.5 upper limit.

Herbalife Ltd. ( HLF ): This 31-year-old nutrition company makes a variety of products, including protein shakes and snacks, energy and fitness drinks, vitamins and nutritional supplements, and skin and hair products. The Los Angeles-based firm sells products through 2.1 million independent distributors across 75 countries. Over the past three years, it has slashed long-term debt from 139% of equity down to just 36% of equity.

Its manageable debt load is one reason Herbalife ($6.8 billion market cap) gets strong interest from my Peter Lynch-based model. It considers the firm a "fast-grower" -- Lynch's favorite type of investment -- because of its impressive 25.0% long-term EPS growth rate (I use an average of the three-, four-, and five-year EPS growth rates to determine a long-term figure). Lynch famously used the P/E/Growth ratio to find growth stocks selling on the cheap. Considering its growth, Herbalife is selling at a reasonable 21.7 P/E, which makes for a P/E/G of 0.87. That comes in under this model's 1.0 upper limit, a good sign.

rue21, inc. ( RUE ): This trendy Pennsylvania-based specialty apparel retailer caters to 11- to 17-year-olds. It recently opened its 700th store in the U.S., and operates in 46 states. It's done a great job of slashing debt -- over the past three years, its long-term debt/equity ratio has declined from 106% to zero.

rue21 ($800 million market cap) gets strong interest from both my Lynch- and O'Shaughnessy-based models. The Lynch approach likes its 36.4% long-term EPS growth ratio and 0.67 P/E/G. The O'Shaughnessy-based model likes its history of persistent growth (EPS have increased in seven straight years) and its price -- the stock trades for a reasonable 1.2 times sales.

United Online ( UNTD ): This Web-based retailer provides a variety of online services and products, including flowers (through FTD and Interflora), "nostaligia" services (Memory Lane/Classmates.com), and Internet and email services (NetZero and Juno). California-based United has cut its long-term debt/equity ratio in half over the past three years, with the ratio falling from 114% to 57%.

United ($530 million market cap) is a favorite of my Greenblatt-based strategy. The model likes United's 15.8% earnings yield and whopping 164.5% return on capital. Overall, it ranks the stock as the 14th-most-attractive in the market right now.

I'm long RUE.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

Referenced Stocks: HLF , RKT , RUE , UNTD , USNA

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