We recently compiled a list of the 10 Best Debt Free Mid Cap Stocks to Buy Now. In this article, we are going to take a look at where Onto Innovation Inc. (NYSE:ONTO) stands against the other debt free mid cap stocks.
Debt-free mid-cap stocks currently offer compelling investment opportunities, especially in today’s high-interest-rate environment. With borrowing costs elevated, companies burdened by debt face increased financial pressure, making debt-free businesses more resilient and attractive. Mid-cap stocks, in particular, balance growth potential with relative stability, often providing more agility and higher upside than large-cap counterparts. Moreover, companies with strong balance sheets and zero debt have more cash capacity to reinvest profits into growth initiatives rather than servicing the debt. As legendary investor Peter Lynch succinctly advised, “Companies that have no debt can’t go bankrupt,” highlighting the inherent safety and resilience found in debt-free investments.
Many modern fund managers support the philosophy of Peter Lynch and prefer companies that have an insignificant impact on profitability from interest costs. For reference, the Fundsmith Equity Fund, which has outperformed the world stock market index by 3 percentage points on average since inception, highlights that one of the secrets of its long-term success is, among others, picking stocks with low amounts of debt. They illustrate their performance by calculating that the average company they own has an interest coverage three times higher than the average company in the US stock market – this is primarily achieved by carefully selecting debt-free companies. They also argue that companies with strong balance sheets are more likely to be priced at higher valuations:
“Our portfolio consists of companies that are fundamentally [including debt levels] a lot better than the average of those in the broader market, so it is no surprise that they are valued more highly than the average S&P 500 company.”
Less than two years have passed since the FED funds rate reached its peak in mid-2023. Contrary to a common misconception, we believe that the effects of high interest rates in the economy have not yet been felt at the individual company level. The reason is simple – most of the debt held by the average US company was issued prior to 2023 at lower coupon rates. In this context, as the lower interest rate debt is gradually refinanced and rolled over, it is inevitable that the actual interest costs of companies will become higher, directly impacting their profitability and cash flows. Lower free cash flow, in turn, means less reinvestment into the business and, as a result, weaker long-term growth potential. This is the mechanism through which the current elevated interest rates may finally hit the stock market in the coming years.
The problem of high interest rates in the economy is further aggravated by the policies of the new US administration. The FED mentions that they are not rushing to lower interest rates because the Trump 2.0 Tariff Turmoil is very likely to cause a spike in inflation in April, as (or if) the previously announced tariffs are enforced. Also, the US job market, manufacturing activity, and consumers are still relatively healthy, albeit there is a slight slowdown in optimism and spending appetite. Under such conditions, any premature cut in interest rates by the FED risks stagflation, which is one of the most destructive scenarios possible. The key takeaway for investors is that interest rates in the economy are likely to stay elevated above 4% for the foreseeable future, meaning that the impact on the profitability of high-debt companies is likely to increase over time. In this context, debt-free companies, and particularly mid-caps, shall be preferred by investors as they offer the most resilience and stability for the future.
Is Onto Innovation Inc. (ONTO) the Best Debt Free Mid Cap Stock to Buy Now?
A technician observing a macro defect inspection process, the precision of the company's systems.
Our Methodology
We used a screener to identify mid cap companies between $2 billion and $10 billion market capitalization, with little to no debt. To quantify the debt level, we compared the enterprise value with market capitalization and opted for the stocks with the smallest difference between the two measures. Then we compared the list with our Q4 2024 proprietary database of hedge funds’ ownership and included in the article the top 10 stocks with the largest number of hedge funds that own the stock.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).
Onto Innovation Inc. (NYSE:ONTO) is a semiconductor equipment and software provider that offers process control solutions, including optical metrology and inspection systems, to enhance yield and device performance in semiconductor manufacturing. Its product portfolio encompasses unpatterned wafer quality assessment, 3D metrology for chip features, macro defect inspection, metal interconnect composition analysis, factory analytics, and lithography for advanced semiconductor packaging. ONTO ranked first on our recent list of 10 Best Mid Cap Tech Stocks to Buy Now.
Onto Innovation Inc. (NYSE:ONTO) achieved a record Q4 with revenue of $264 million, marking their sixth consecutive quarter of growth. The company demonstrated strong financial performance in 2024, achieving 21% revenue growth, 37% operating income growth, and 43% growth in both cash from operations and EPS. AI packaging emerged as a significant growth driver, with inspection tool revenue more than doubling for the year. The company’s metrology revenue in advanced packaging exceeded $50 million, more than triple that of 2023.
Looking forward, Onto Innovation Inc. (NYSE:ONTO) identified three key secular growth drivers: AI demand growing at a high pace, increased demand for gate all around DDR5 memory and high-stack 3D NAND, and the electrification trend. The company’s gross margins improved every quarter in 2024 to end at nearly 55% in the fourth quarter, with continued focus on margin improvements throughout 2025. The company also launched several new products aimed at strengthening opportunities in advanced packaging, advanced nodes, and power semiconductors, with meaningful revenue expected in 2026. With close to zero debt and 50 hedge funds owning the stock, ONTO is one of the best debt free stocks to buy.
Overall, ONTO ranks 5th on our list of the 10 best debt free mid cap stocks to buy now. While we acknowledge the potential of ONTO as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than ONTO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
