Shareholder activists hate to see a company with too much cash.
They rattle cages in hopes of getting a company to issue a one-time
, or make some other bold move that can shake up a stock. But many
companies simply refuse to listen. They know the
cycles up and down, and they like to keep cash on hand for the next
Well, with share prices across the stock
in free-fall, that rainy day has arrived. Cash piles are now so
large -- especially in the context of quickly-falling stock prices
-- that it may be time to put that money to work. As an investor,
you should be looking to put your money into these types of
companies, because they are best positioned for downside protection
in a rough market -- and have plenty of ammo to boost
I did a little digging and was amazed to find out how many
cash-rich companies we're talking about. Looking at the 1,500
companies that make up the S&P 400, 500 and 600, nearly 10% of
them now have net cash levels worth at least 20% of their
. And you don't need to focus on tiny, little-known companies to
find these cash hoarders. Using $500 million as a minimum market
value, and tightening that cash threshold to 25%, you can still
find 56 companies that fit the bill, including names I'm a big fan
of, such as
Cree Inc. (Nasdaq:
Analog Devices (NYSE:
Remarkably, there are more than two dozen companies that have
net cash that equals at least 33% of the company's market value. At
some point soon, these companies may look to support their flagging
stock prices with a buyback, an
or a dividend boost. At a minimum, the huge cash balance gives some
support to shares -- a key consideration in this panicky
It's no coincidence that the list is dominated by tech stocks.
These companies always have a predilection for generating cash,
in recent years has left these companies with arguably too much
cash, with more than enough money to handle any challenges an
economic slowdown may bring.
Of course, some of these cash-rich tech plays, such as
Cisco Systems (Nasdaq:
have recently delivered tepid quarterly results, and there are few
reasons to expect these stocks to be bid up right now, except for
their pristine balance sheets. All they can do is make the best of
a bad situation. For Cisco, this means continued stocks buybacks,
which have already shrunk the share count in dramatic fashion.
A solid chip play
Yet there are some tech stocks with solid catalysts in this group.
as an example. The chip maker is in the midst of a major push into
the smartphone segment with the third generation of its Tegra chip,
which has been designed into 30 different phones hitting the market
Management thinks 25 million of these chips will ship this year,
roughly double the amount shipped in 2011. The smartphone chip
market has historically been dominated by
, though a design win with
and a number of Asian phone makers should make Nvidia a
fast-growing number-two player in this market.
Shares of Nvidia have slumped to an 18-month low to a recent
$12, though analysts at Needham see shares rebounding to $20.
That's solid potential upside, with the company's net $5 a share in
cash providing downside support.
Not just tech
Health care providers also seem to be trading on the cheap in
relation to their cash positions. Take
as an example. After falling roughly 20% since the year began, the
company is worth $12.4 billion on the market -- not much more than
its $11.3 billion net cash position. Why so much cash? Because
regulators like to see insurers maintain stable financial
positions, but management appears to have overlooked the fact that
rising annual cash flow has let the cash balance grow unchecked. It
stood at just $5.4 billion at the end of 2008.
Management finally understands the need to put that cash to use,
recently telling The Wall Street J ournal that Humana may pursue
acquisitions that bolster the company's presence with
. A quicker way to satisfy investors? Beef up the dividend, which
currently yields just 1.4%. With more than enough cash in place
already, Humana could conceivably earmark all future cash flow
toward the dividend and instantly create a 15% to 16%
. Even a 6%
would keep most of the company's cash flow in house.
Risks to Consider:
Management of these companies may look to make acquisitions
with all of that cash, a move that is not always welcomed by
investors. Dell, for example, has been an acquisition machine, and
has little to show for it.
Action to Take -->
The market sell-off is creating deep values, and the
is a fine place to start your research. These companies have built
up embarrassingly high levels of cash, and the balance sheets now
stand in stark contrast to the share prices. These stocks could
fall further in this tough market, but the cash positions should
cushion any blow.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of CSCO, CREE, GOOG in one or more if its "real money"
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