Companies don't need to pile on debt to grow, says Art J. Bonnel, subadviser of the $79 million Bonnel Growth fund for the United Services family of funds.
Avoiding highly leveraged companies certainly hasn't hurt his fund, which is up 7.4% for the year through July 31. (The Standard & Poor's 500 Stock Index returned 3.9% for the same period; the Russell 2000, 0.01%.)
Mr. Bonnel's midcap growth fund holds 120 companies in 60 industries with a median market capitalization of about $450 million. The portfolio's median price-earnings ratio is in the mid-20s vs. 19.46 times for the S&P 500.
"I'm more balance-sheet-oriented than price-oriented," said Mr. Bonnel. He noted he seeks stocks with a ratio of current assets to current liabilities of 2: 1 or better. Some 30% to 50% of his companies have no debt.
"It doesn't seem to compromise their ability to grow," he said.
Among the firms free of long-term debt: Electronics for Imaging Inc., a software and desktop publishing company; Coastcast Corp., which makes golf equipment; and Claire's Stores Inc., a retailer.
He also likes The Gap Inc., which he expects to grow dramatically, and has no long-term debt.
His fund has 50% in technology, the midpoint of his range. Other big weightings include retailing (13%) and health care (17%).
Mr. Bonnel, whose only client is United Services, works out of his home in Reno, Nev., and does his own trading.
Mr. Bonnel is just as happy to own companies with turbo-powered earnings growth like Atmel Corp., a semiconductor stock, as he is to hold companies with slower but steady earnings growth, such as Sears, Roebuck & Co. and The Clorox Co.