5 Debt-Free Stocks

Seems like a double-standard, doesn't it? You're supposed to do everything you can to eliminate your debt, but the companies you invest in keep big loans on their balance sheet.

Let's hope their investments are better than what you've got to show for those five-digit balances on your Visa bill. After all, companies should use corporate debt for expansion opportunities that deliver revenue growth and margin improvement -- as opposed to your "investments," which probably will result in only the latest fashion styles for your kids and maybe a new flat-screen TV for you.

But if your goal is to be debt-free, you might want to consider investing in companies that share that goal by having no long-term debt. Here are five debt-free stocks to consider from various sectors of the market.

Retail: American Eagle Outfitters
Several retailers maintain debt-free balance sheets, including Gymboree, Ann Taylor (NYSE: ANN  ) , and American Eagle Outfitters (NYSE: AEO  ) . But American Eagle has done so while generating steady revenue growth of 17% over the past four quarters, with strong returns on equity and assets. What's more, American Eagle has remained debt-free while moving into a spiffy new corporate headquarters near downtown Pittsburgh.

Software: SAP
Business-software provider SAP (NYSE: SAP  ) is a compelling debt-free alternative. Yes, Microsoft (Nasdaq: MSFT  ) is also debt-free, but SAP has a growth rate that's half again as large. Although SAP trades at a slightly higher multiple to earnings, its faster growth projections may warrant the higher price. Microsoft continues to dominate from an operating standpoint, with strong margins and returns on equity and assets. But SAP could gain traction if corporations looking to become more efficient start buying more of its software.

Restaurants: Panera Bread
What happened to Panera Bread (Nasdaq: PNRA  ) ? The upscale lunch spot had traded above $70 a share two years ago, but now it's a shadow of its former self and trades at barely half that amount. But Shamrock Capital Advisors has purchased 6.6% of Panera and is now seeking a seat on the board. Revenue growth remains strong -- almost 30% over the past 12 months -- and Panera could regain its previous strong standing if it can bring margins up to a respectable range.

Gaming/entertainment: Electronic Arts
On its surface, Electronic Arts (Nasdaq: ERTS  ) looks like a strange candidate for this list, with net losses over the past year, anemic revenue growth, and negative margins. But EA has no debt. And when you consider its online basketball platform and its exclusive deal with the NFL, you can see that it also has strong growth prospects. But sales have been stagnant since 2004, and the company still has to show that it can grow in this increasingly competitive marketplace.

Internet: WebMD
In today's health-conscious world, we've all probably looked up our latest ailments to better understand our prognosis. WebMD (Nasdaq: WBMD  ) is counting on you to stop by -- and to click on some ads while you're at it. Though the company is debt-free, it's pretty expensive, trading at an earnings multiple of nearly 100.

However, WebMD has maintained high growth rates -- more than 40% in the past four quarters, and 50% in 2006. Still, the forecast for online content providers hasn't been great, so WebMD isn't a slam-dunk investment.

Having no corporate debt doesn't necessarily mean that a company has limited growth opportunities. No debt can be a sign of strong corporate management, or a result of a business with strong cash flow. But just as not all consumer debt is bad, you have to consider debt situations on a case-by-case basis, to determine whether each one is positive or negative for a company's prospects.

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