March 16 (Bloomberg) -- Now, more than ever, is a good time to buy stock in companies with low debt.

Even in normal times, I like companies with debt less than stockholders’ equity -- preferably less than 50 percent of equity. Such companies have strategic flexibility: They can fund new projects, increase dividends, buy back stock or acquire troubled rivals.

Companies with high debt, by contrast, lack the financial wherewithal to do most of those things. In addition, they must spend a lot of their time renegotiating interest rates and debt covenants with banks or bondholders.

Today, low debt seems an even more desirable trait than usual. The severely contracting economy leaves most companies a thinner revenue stream from which to service debt. Too many lenders, on shaky ground themselves, are in no position to renegotiate debt agreements even if they want to.

Interest rates, though not onerous now, may rise as the federal government struggles to finance ambitious financial rescue programs for banks, homeowners, and automakers.

In good times, high-debt companies can turn to the stock market and pay down debt by selling stock. Today, however, the wounded stock market offers companies little chance for that.

As for acquiring rival companies that have stumbled, today is a great time to do it if you only have the cash.

Below I recommend five companies that have no debt whatever. Of the 1,556 U.S. stocks with a market value of $500 million or more as of March 13, only 176 met that criterion, as of their latest quarterly reports.

Debt-Free Companies

They include household names such as Google Inc., which sells for 20 times earnings, and Apple Inc. at 18 times. Although those are not unreasonable multiples for such successful companies, I prefer cheaper valuations.

Take Gymboree Corp., for example. In the teeth of a nasty recession, the San Francisco-based children’s clothing retailer had record earnings of $1.14 a share on record sales of $289 million in the quarter ended Jan. 31. It has been profitable 13 quarters in a row.

Yet on March 5, Gymboree stock fell 31 percent after the company forecast that same-store sales could drop 25 percent this year. The stock sells for six times earnings.

Titanium Metals Corp., based in Dallas, Texas, is similarly valued. It sells for six times earnings and only 0.8 times book value.

Titanium Metals earned more than 40 percent on equity in 2005 and 2006. Last year it slowed to a still-respectable 15 percent. Aircraft manufacturers and golf-club makers crave titanium for its combination of strength and light weight. The recession may shrink the company’s growth rate for a year or two, but I believe it will bounce back.

Deckers Outdoor Corp. of Goleta, California, also looks attractive to me. The maker of Uggs boots and Teva sandals has kept growing in spite of the recession.

In the quarter ended December 31, for example, Deckers posted sales of $303 million, up from $194 million in the same quarter a year earlier. Earnings rose to $4.10 a share from $2.69.

The stock sells for only six times earnings after a big fall in late February, when the company issued a forecast that 2009 profit would be below the $7.27 a share achieved in 2008. Analysts had anticipated profit of $7.71 a share, the average of eight estimates compiled by Bloomberg. To me, predicting an earnings decline during an economic meltdown is neither a disgrace nor a surprise.

Forest Labs

A court case has taken some of the wind out of the sails of Forest Laboratories Inc. Federal prosecutors have accused the company of making false claims in marketing its antidepressants Lexapro and Celexa.

The complaint, unsealed in Massachusetts federal court last month, alleges that Forest promoted the two drugs for off-label use in children, and paid kickbacks to doctors to prescribe them. Forest says it has always tried to observe high ethical standards, and since 2004 has publicly disclosed the investigation that led to the current complaint.

Forest earned a 29 percent return on equity in fiscal 2008. Its stock sells for six times earnings and 1.5 times book value.

Finally, I recommend Patterson-UTI Energy Inc., a contract oil and gas drilling company based in Snyder, Texas. Most years, contract drillers don’t have a lot of bargaining power, and must take what the oil and gas companies choose to dish out.

From time to time, though, the demand for drillers exceeds supply and they can chalk up big profits. That’s why annual returns for drilling companies like Patterson-UTI tend to be erratic. Patterson stock, for example, was up 220 percent in 1999 and 186 percent in 2000. However, it was down 79 percent in 1998 and 41 percent last year.

Patterson’s earnings are less erratic than its stock. It has posted profits nine consecutive years. The stock sells for less than four times the past four quarters’ earnings.

Bear Case

Patterson-UTI is the only stock discussed in this column that I currently own for some of my clients.

Have I ever violated my own dictum about investing in low- debt companies? Yes, and sometimes I’ve regretted the decision. In early 2008, I invested in Bear Stearns & Co. stock for some clients and myself.

Knowing a number of talented analysts and astute traders at Bear Stearns, and having respect for top management, I persuaded myself that the company’s heavy debt didn’t matter. By March 2008, when the federal government forced a shotgun wedding to JPMorgan Chase & Co. at a low price, it was clear that it mattered very much.

(John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.)

To contact the writer of this column: John Dorfman at jdorfman@thunderstormcapital.com.

Last Updated: March 16, 2009 00:01 EDT