The brutal market swoon has reminded us of an oft-repeated
lesson: even the best companies can get swept up in a downdraft.
This across-the-board selling, frequently the result of an economic
slowdown, can end up revealing a clear chasm. On the one side are
companies that would indeed run into trouble if sales fell and
financial resources grew limited. On the other side of the ledger
are companies that are so strong, so flush with cash, that even
another dip back to
couldn't derail them. But because investors are also
indiscriminately shedding these stocks, they're presenting clear
and compelling "buy" signals.
I've come across 12 stocks that simply can't be ignored. They're
sitting on huge piles of net cash, while being prodigious producers
free cash flow
. The market sell-off positions these companies to put their cash
to use. Whether it's deal-making, stock buybacks,
hikes or simply investments in their business to pursue long-term
growth, these companies can step on the gas while many others would
need to retreat in an economic downturn.
You'll recognize some of these names from my recent articles. For
example, I recently suggestedshares of
Micron Technology (NYSE:
looked quite compelling and, though they have moved up more than
10% since then, they still look far too cheap by a variety of
I also wrote about
Analog Devices (NYSE:
in August and noted the company has deployed its strong
on extensive research and development (R&D) spending, which has
led to a great
performance. I still like Micron and Analog Devices a lot.
The balance-sheet surprise
It's no surprise to see the big tech firms with very high cash
levels. Firms such as
Cisco Systems (Nasdaq:
have always been highly debt-averse. They build cash hoards for a
"rainy day," but their rising cash levels are reaching levels for
far beyond any conceivable rainy day. The high-cash level is
partially attributable to tax exposure of foreign profits when they
are repatriated, though currently contemplated legislation could
lower the tax rate, setting the stage for a return of this cash to
the United States.
But one company is not historically seen as a balance-sheet
powerhouse, but has now come to dominate such cash-focused stock
screens. I'm talking about
, which rallied after its late 2010
at $35 a share to almost $39, but has plunged since then and is now
trading at about $22.70.
How deeply has GM fallen? The automaker carries more than $30
billion in net cash, not far from its entire stock
. It's as if investors were saying the company's auto business is
worth almost nothing. This is a company that still had $136 billion
in sales in 2010 (down from $180 billion in 2007). Remarkably, GM
was able to generate
of about $16.5 billion in 2010, which was 25% higher than the 2007
levels. So sure sales have fallen, but costs have fallen even more.
Yet the current economic slowdown has led investors to again fear a
2008-style meltdown, which as you probably know, didn't play out so
well for GM back then. Yet the eventual bankruptcy and IPO of GM
created a new company with a sterling balance sheet. Right now,
analysts expect GM to earn nearly $6 billion (or $4 a share) in
2011 and a similar amount in 2012. Let's assume analysts are too
optimistic and GM fails to make this money because the possible
looming economic recession may take a big bite out of sales. Simply
put, this company is not poised for trouble even if it doesn't make
any money in 2012. It's only a matter of time, perhaps 2013 or
2014, when business fully rebounds and GM starts making more than
$5 billion a year.
Make no mistake, real challenges have emerged for GM since the
well-received IPO of last fall. It has become apparent the
product-development process slowed to crawl during the financial
difficulties of 2008 and 2009. So GM is only now making a big
R&D push, which won'tbear tangible fruit for another 12-24
months. In addition, after a steady brain drain, the company's
management team has not been as impressive as the managers running
Ford. GM has more work to do to build a top-notch team that really
knows the auto business. Lastly, GM's highly-profitable pick-up
truck business doesn't look so good right now, since the housing
market is still on the ropes, leaving the hundreds of thousands of
contractors employed by the construction industry with little
reason to buy new trucks right now.
These challenges shouldn't be overstated, however, and there's
little reason why GM should be valued at almost nothing, which is
the case when you back out all that cash. When investors eventually
look past the near-term economic headwinds, they'll notice GM is
one of the cheapest stocks on the market.
Risks to consider:
GM and the other stocks I mentioned above are unlikely to rally
quickly, because first investors will need to get a sense of how
short- or long-lived any economic slowdown may be.
Action to Take -->
In this unsteady it market, it pays to play defense. Focusing on
companies with very strong balance sheets can provide investors
with upside exposure in any market rally and downside protection in
any further market weakness. As market-timing is nearly impossible,
investors have a rare chance to buy these balance-sheet kings while
they remain so cheap.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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