These High-Tech Stocks are Sitting on a Mountain of Cash

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Prior to the recent market slump, you could find many companies with enough cash to equate to 10% or even 20% of their market value . Yet as stock prices have fallen and those cash balances have remained intact, a very unusual event has occurred. It's now not hard to find companies with cash that equates to 30%, 50% or in rare instances, even 100% of their market value.

Why on earth would a company like Sycamore Networks (Nasdaq: SCMR ) , which makes communication equipment for fixed-line and mobile networks, be worth less than its cash? Because the company repeatedly fails to earn a profit and investors assume theist $555 million cash balance will steadily shrink. At current burn rates, cash would only get down to the company's market value in about three years. Before that happens, the company hopes to get a lot more traction for its IQStream technology, which is sort of a traffic cop for data on mobile networks.

Various options
What a company does with a huge amount of cash can ultimately light a fire under a beaten-down stock. Judging by recent moves, the range of options is limitless. For example, digital media firm RealNetworks (Nasdaq: RNWK ) , which saw the value of its stock fall almost all the way down to the market value, has decided to give shareholders a one-time $1 per share dividend that will return $137 million to its rightful owner -- shareholders. This should still leave $190 million lying around to make investments into the business.

Other companies such as Applied Micro Cirucits (Nasdaq: AMCC ) , Benchmark Electronics (NYSE: BHE ) , Veeco Instruments (Nasdaq: VECO ) and Monolithic Power Systems (Nasdaq: MPWR ) are using their cash for plain old stock buybacks.

Electro Scientific (Nasdaq: ESIO )
One of the stranger outcomes of the recent market plunge is investors failed to separate companies that are doing well from those that are not. Electro Scientific is a prime example. Electro Scientific makes lasers and other tools used to precisely manufacture a range of high-tech products, known as micro-machining. For example, Apple (Nasdaq: AAPL ) uses the equipment to place tiny features on the iPhone and the iPad. Indeed, it appears a fresh new order from Apple is what led management to offer guidance well ahead of consensus forecasts.

Electro Scientific was delivering solid fiscal first quarter earnings , while predicting results for the current quarter will be even stronger -- well ahead of what analysts had been anticipating. This still wasn't enough to prevent a quick pullback in the stock, which erased 20% of its value. Strip out the company's $200 million cash balance, and this is a very cheap stock with solid growth prospects.

Unless theeconomy falls into a deep and prolongedrecession , Electro Scientific appears poised for continued strong growth. The company's backlog (even outside of Apple) is rising at a good clip. Sales grew 72% in fiscal (March) 2011 to $257 million, and this figure should rise another 25% this year, according to Needham & Co. The stock may not look cheap at around 15 times Needham's fiscal 2012 forecast, but if you exclude the company's cash, the multiple drops by almost half. Shares have fallen back to $15, but Needham sees a rebound to $27 coming, "given the momentum in the business and strong new product lineup."

Aerovironment (Nasdaq: AVAV )

This company has always sported a sexy business model . One division makes unmanned aerial drones that are seeing increasing use in war zones like Iraq and Afghanistan. The other business involves charging stations for electric vehicles. Management has been able to successfully lift both of these businesses off the ground simultaneously, boosting sales at least 15% every year since 2005 (except for 2009, when sales were flat).

But the streak is set to come to an end because continued growth in the electric charger market isn't enough to offset a slowdown in the defense business. Total sales are likely to grow just 10% in 2011 and 2012. Earnings are also set to grow at that modest pace, partially due to management's decision to heavily invest in research and development. This partially explains why shares have slumped from $36 to $26 in the past month.

At first blush, it's hard to consider this to be a cheap stock when you see earnings growing 10%, but the shares trading at about 15 times projected 2012 profits. Then again, the multiple falls to 10 when you strip out the company's $195 million in net cash.

The main questions for investors are twofold: will the electric car-charging business pick up as Ford (NYSE: F ), BMW, Mitsubishi and others roll out all-electric vehicles in 2012? If investors come to embrace fully electric cars, then demand for chargers should really take off.

Second, will the company's drone business keep growing as competition from the likes of Boeing (NYSE: BA ) builds and defense budgets come under scrutiny? The simple fact that it's a lot cheaper to operate a drone than a piloted plane should help demand to stay aloft for all drone makers, even as other areas of defense get slashed.

In its 4-and-a-half years as a public company , Aerovironment has never traded below $19, while in loftier markets, it has moved up toward the $40 range. The recent pullback to $26 moves the stock back into value territory in advance of an eventual rebound in growth.

Action to Take --> If share prices stay depressed for a while to come, look for these cash-rich firms to come out with additional measures to support their stock, whether it's a fresh dividend, a growth-inducingacquisition or even deeper stock buybacks. For investors, the large cash balances give investors an extra degree of comfort at a time when many stocks are searching for a bottom.


-- David Sterman

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One of these stock has plowed through 8 bear markets and has returned over +170,000% since 1972. Every $700 you invested back then would be worth more than $1 million right now. Today, the company is raising its dividends, spending billions to buy back its own shares, making smart acquisitions, and is the dominant leader in a $30 billion market. This stock is just one of the 10 best "Forever" stocks to own today.

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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This article appears in: Investing , Investing Ideas

Referenced Stocks: BHE , MPWR , RNWK , SCMR , VECO

David Sterman

David Sterman

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