In a rising interest rate economy, risk-averse investors need to be paying attention to companies with high debt loads. Those are the types of companies that could be hit hardest as interest rates rise as that can lead to smaller profits.
The good news is that you don't have to sacrifice investing in growth stocks altogether and just load up on ultra-conservative investments to battle interest rate increases. A couple of fast-growing companies that aren't saddled with much debt are Vertex Pharmaceuticals (VRTX 0.15%) and Alphabet (GOOG 0.66%).
Image source: Getty Images.
1. Vertex Pharmaceuticals
Healthcare company Vertex Pharmaceuticals is a growing business that reported $7.5 billion in sales in 2021, up 22% from the previous year. Key to its growth is its cystic fibrosis drug Trikafta/Kaftrio, which is a blockbuster that on its own contributed $5.7 billion to the company's top line last year. And the company is also working on another potential blockbuster with CRISPR Therapeutics: A gene-editing therapy, CTX001, which treats beta-thalassemia and sickle cell disease.
Even as it grows and pursues more growth opportunities, Vertex is backed by a strong balance sheet. All of its liabilities (both short- and long-term) total $3.3 billion, and the company's cash balance of $6.8 billion would be enough to clear that off.
Over just the past 12 months, Vertex has generated $2.6 billion in cash from its day-to-day operating activities. The company has been in such good shape that it has been able to buy back shares to the tune of $1.4 billion last year -- nearly three times the $539 million it spent on repurchasing shares in 2020.
Year to date, the stock has risen 15%, outperforming the S&P 500, which is down 4%. The stock currently trades at a price-to-earnings (P/E) multiple of 28. While that isn't terribly cheap, it pales in comparison to the 48 times earnings that investors are paying for drugmaker Eli Lilly. Vertex's business isn't as large, but given the growth that it is generating, it still makes for a solid long-term buy.
2. Alphabet
Another strong cash-generating business is Alphabet. The tech giant that owns Google and YouTube is a money-making machine. Last year, the company brought in a whopping $91.7 billion from its operating activities. That was a 41% increase from the previous year, when it reported $65.1 billion in cash from operations. Like Vertex, it has also been buying back its own shares. Last year, Alphabet spent $50.3 billion on buybacks, up from $31.1 billion the year before.
Plus, there could be even more growth opportunities ahead. Google may be a big benefactor from Apple's new privacy changes on its iPhones, which are making it easier for users to turn off tracking -- which, in turn, can lead to advertisers reaching fewer consumers. That can be a problem for some social media sites, leading to a decline in their ad revenue.
And some of that ad spend could inevitably find its way onto Google's platforms, including YouTube ads, which for the period ending Dec. 31 reported $8.6 billion in revenue, up 25% year over year. In total, Google's advertising revenue topped $61.2 billion for the period compared with $46.2 billion a year earlier, for a growth rate of 33%.
The business is strong enough to support Alphabet's debt of $14.8 billion. That's less than the $20.9 billion in cash and cash equivalents the company reported as of the end of last year. Meanwhile, total liabilities of $107.6 billion are less than Alphabet's cash and marketable securities, which are worth $139.6 billion.
So there's little reason for investors to worry about Alphabet's business. With its sound financials and significant cash flow coming in every quarter, the company can easily withstand an increase in interest rates. And at a price-to-earnings ratio of 25, the stock is cheap compared to rival Apple, for which investors are paying a multiple of 29.
