Prior to the recent market slump, you could find many companies
with enough cash to equate to 10% or even 20% of their
. 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:
, which makes communication equipment for fixed-line and mobile
networks, be worth less than its cash? Because the company
repeatedly fails to earn a
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
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
, 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
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:
Benchmark Electronics (NYSE:
Veeco Instruments (Nasdaq:
Monolithic Power Systems (Nasdaq:
are using their cash for plain old stock buybacks.
Electro Scientific (Nasdaq:
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,
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
, 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
Unless theeconomy falls into a deep and prolongedrecession ,
Electro Scientific appears poised for continued strong growth. The
(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
have fallen back to $15, but Needham sees a rebound to $27 coming,
"given the momentum in the business and strong new product lineup."
This company has always sported a sexy
. 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
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
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
, 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
-- David Sterman
The 10 Best Stocks to Hold Forever
One of these stock has plowed through 8 bear markets and has
returned over +170,000% since 1972. Every $700 you invested back
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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
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Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.