We recently compiled a list of the 7 best debt-free stocks to buy, and in this article we'll look at how Cassava Sciences Inc (NASDAQ:SAVA) stands up against other debt-free stocks.
Debt has always been the driving force behind many companies in the stock market, and access to cheap capital when interest rates were at an all-time low of 0.25% led most S&P 500 companies to shore up their balance sheets to fund a variety of operations, including research and development and current spending.
However, at the Federal Reserve's July 30-31, 2024 meeting, interest rates were left unchanged at 5.25%-5.50%. Officials noted that inflation was approaching its target, and that a rate cut was possible in the future. “The Committee judges that risks to the achievement of its employment and inflation objectives continue to move toward a more favorable balance,” the Federal Open Market Committee said. Chairman Jerome Powell said a rate cut was possible in September if inflation continues to moderate.
Also read: 15 Most Feared Activist Hedge Funds and 10 Stocks with the Highest Monthly Dividends.
To combat inflation, interest rates have been raised 11 times between March 2022 and July 2023. “If you cut rates by 0.25% each, that's 12 cuts over a few years, so this isn't something that's going to happen anytime soon,” said Amy Hubble, chief investment adviser at Radixx Financial.
The interest rates that businesses pay on business loans in the United States vary widely depending on factors such as the type of loan, the lender, and the business's creditworthiness. As of 2024, the average interest rate for a small business term loan ranges from 7.85% for a fixed-rate loan to 8.79% for an adjustable-rate loan. Interest rates for online business loans range from 9% to 75%, while interest rates for SBA loans range from 11.50% to 16.50%. For businesses with poor credit, interest rates can be significantly higher.
But what has become clear since the 2008 financial crisis is that large amounts of debt can weigh heavily on companies and have serious consequences. In 2018, the number of companies that defaulted on their loans rose to 153 from 85 the previous year amid a high interest rate environment, as the Federal Reserve Board raised interest rates to 5.25%-5.50% to curb inflation.
Large corporations could find themselves in trouble after the Federal Reserve reported that US companies have $13.7 trillion in debt. Standard & Poor's noted that the amount of debt held by corporations has increased by 18.3% since 2020, mostly as companies took advantage of the Federal Reserve's moves to cut interest rates early in the pandemic.
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While most would argue that debt-free companies do not optimize their capital structure for growth, that is sometimes the case. The best debt-free stocks to buy are companies with strong balance sheets due to their strong free cash flow generation capabilities. This also confirms that the company's core business is resilient enough to generate significant cash flow, avoiding the need to take on debt.
But borrowing money is only acceptable if a company is profitable and has strict procedures in place to prevent defaulting on payments. If a large company defaults on its debts, it can lead to bankruptcy.
In the US, fears of an impending recession and rising interest payments due to rising benchmark interest rates have forced companies to significantly reduce their debt load. As a result, some companies are sticking to their position of operating within their capacity, relying on free cash flow instead of taking on debt.
In this case, some companies have a track record of operating with little or no debt. Instead of taking on debt, they hold cash and short-term liquid assets to fund acquisitions and day-to-day operations.
Therefore, the best debt-free stocks to buy are those of companies that are good at meeting their financial responsibilities, making them attractive investments for individuals looking for stability. A debt-free status indicates that an organization has low financial risk and high financial flexibility.
The debt-to-equity ratio is a common financial metric used to measure a company's financial leverage. It is calculated by dividing total debt by shareholder equity. A company with a high debt-to-equity ratio compared to its industry average means it relies heavily on debt to fund its operations, which could be risky.
Generally, the optimal debt-to-equity ratio for companies looking to manage their debt is 1 to 1.5, but the appropriate ratio depends on a variety of factors, including the company's stage of growth and industry sector.
In addition to the debt ratio, it is essential to assess enterprise value when analyzing the best debt-free stocks. Enterprise value is calculated by taking into account both the current share price (market capitalization) and the cost of servicing debt (net debt or debt minus cash).
Companies with strong financial positions tend to have an enterprise value much lower than their market capitalization, meaning they have a lot of net cash.
Our Methodology
We combed through the top 100 stocks on the Yahoo Screener to select those with zero or very little debt, compared their enterprise value (EV) to market cap, and ranked the best debt-free stocks in order of their upside potential as of August 16th.
At Insider Monkey, we stick to stocks that hedge funds concentrate their investments in. The reason is simple: our research shows that by mimicking the top stock picks of the best hedge funds, you can outperform the market. Our quarterly newsletter strategy selects 14 small- and large-cap stocks each quarter, and has returned 275% since May 2014, beating the benchmark by 150 percentage points (more details here).
Scientist in lab coat working with microscope in laboratory.
Cassava Sciences, Inc. (NASDAQ:SAVA)
Market cap as of August 16, 2024: $1.36 billion
Enterprise value: $1.24 billion
Potential for increase: 617.16%
Cassava Sciences Inc (NASDAQ:SAVA) is one of the best debt-free stocks to buy to gain exposure to the healthcare sector. The company operates as a clinical-stage biotechnology company developing treatments for neurodegenerative diseases. The company's flagship product is Simufilam, a small molecule drug for detecting Alzheimer's disease.
Cassava Sciences Inc. (NASDAQ:SAVA) has been flat this year, but its shares more than doubled in June before suffering a big sell-off. The stock rose more than 30% after CEO Rick Barry published an open letter announcing positive results from a Phase 2 trial of its experimental Alzheimer's drug simufilam.
The big drop comes after former Cassava Sciences Inc. (NASDAQ:SAVA) consultant Hoau-Yan Wang was indicted on charges of fraudulent claims relating to experimental drugs, charges the company has denied.
Cassava Sciences Inc. (NASDAQ:SAVA) had approximately $14.19 million in debt at the end of last year. The company also boasts an enterprise value of $935.78 million and a market capitalization of $1.06 billion.
Wall Street analysts rate Cassava Sciences Inc (NASDAQ:SAVA) a “Moderate Buy” with a target price of $107, suggesting an upside potential of 617.16% from current levels. According to the Insider Monkey database, 6 out of 920 hedge funds tracked hold shares in the company as of the end of the first quarter of 2024.
Overall, SAVA ranks #1 on our list of best debt-free stocks. While we acknowledge SAVA's potential as an investment, we believe AI stocks have a better chance of delivering higher returns in the short term. If you're looking for more promising AI stocks than SAVA, check out our report on the cheapest AI stocks.
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Disclosures: None. This article was originally published on Insider Monkey.
