Four Guru-Inspired Picks That Are Putting Their Cash To Work
"Cash is king," the saying goes, but since the U.S. pulled out of the 2008-09 financial crisis, cash has been more like a pauper. With interest rates having remained near zero for the past few years, investors have earned just about nothing on their money market funds.
But that hasn't stopped U.S. companies from hoarding the green stuff -- more than $3.5 trillion in cash is parked on their balance sheets right now, according to Yahoo! Finance. Some are holding the cash because, though the economy has come a long way since the financial crisis, they remain extra cautious, not wanting to get caught with their pants down should another shockwave hit the financial system. Some fear the sluggish recovery is indicative of a "New Normal", one in which there won't be enough demand for their products and services to merit expansions of their businesses. In addition, much of the cash is parked overseas, and bringing it back to the U.S. means paying repatriation taxes on it.
The fact that they're not seeing enough of their companies' green has many investors seeing red, including Greenlight Capital's David Einhorn. The hedge fund guru is suing Apple over the way it plans to use -- or not use -- its huge pile of cash.
But not all firms have been hoarding their cash. Over the past couple years many companies have increased their dividend payouts or bought back significant amounts of their own shares, both of which enhance shareholder value. Of course, such efforts alone aren't reason to invest in a stock. Any stock you buy should have strong fundamentals, and the underlying business should have strong financials and a good track record. That's why I recently used my Guru Strategies, each of which is based on the approach of a different investing great, to find some companies that have been putting their cash to work and also have strong financial and fundamentals. Here are some of the companies that made the grade. As always, keep in mind that stocks like these should be considered as part of a well diversified portfolio.
CVR Partners LP ( UAN ): This Sugar Land, Tex.-based firm ($1.9 billion market cap) is a master limited partnership that produces nitrogen fertilizers. If you want access to the cash the companies you invest in are generating, you get it with CVR -- it has a policy of paying out all available cash in quarterly distributions. In the past year, it has paid out $1.81 per share, which amounts to a yield of 6.9%.
CVR has more going for it than just that yield. It trades for a reasonable 13.9 times trailing 12-month earnings per share and has a 37.3% long-term EPS growth rate. (I use an average of the three-, four-, and five-year EPS figures to determine a long-term rate.) Mutual fund legend Peter Lynch famously used the P/E-to-Growth ratio to find bargain-priced growth stocks, and when we divide CVR's P/E by its growth rate, we get a PEG of 0.37. That falls into this model's best-case category (below 0.5).
Another good sign: CVR's debt/equity ratio is a reasonable 27%.
CACI International Inc. ( CACI ): Based in Arlington, Va., CACI provides IT and professional services in the defense, intelligence, homeland security, and IT modernization and government transformation arenas. The $1.2-billion-market-cap firm has taken in more than $3.7 billion in sales in the past year, and has more than 120 offices across North America and Western Europe. Over the past five years, CACI has implemented multiple share repurchase programs, decreasing its number of shares outstanding by more than 20%.
CACI is an unloved stock that's a favorite of my Joel Greenblatt-based approach. Yes, its government dealings could be impacted if the defense budget sequestration occurs. But the stock is so cheap that much of the impact appears to be priced into shares. The Greenblatt approach -- a remarkably simple one that looks at just two variables -- likes its 14.8% earnings yield, for example. The strategy also likes CACI's 61% return on capital. Those two figures make it the 14th most-attractive stock in the market, according to the Greenblatt model.
O'Reilly Automotive, Inc. ( ORLY ): Missouri-based O'Reilly ($11.6 billion market cap) sells aftermarket auto parts, tools, supplies, equipment, and accessories to both professional service providers and do-it-yourself customers. The 55-year-old company has about 3,700 stores in 39 states. O'Reilly bought back about 16 million of its own shares in 2012 as part of a $3 billion share repurchase program. It still has about $400 million left on that authorization.
O'Reilly gets is another favorite of my Lynch-based model. It's been growing EPS at a 28.5% rate over the long haul. That and its 21.4 P/E ratio makes for a PEG ratio of 0.75, which comes in under this model's 1.0 upper limit, a sign the stock is a good value. O'Reilly also has a 52% debt/equity ratio, which comes in well under the model's 80% limit.
ConocoPhillips ( COP ): Houston-based Conoco is an integrated oil and gas firm that has operations in more than two dozen countries. The $70-billion-market-cap firm, which spun off part of its business into Phillips 66 last year, has significantly upped its dividend payouts in recent years, and it bought back more than $5 billion worth of its shares in 2012.
Conoco's strong 4.6% dividend yield is one reason it gets strong interest from my James O'Shaughnessy-based value model. When looking for value plays, O'Shaughnessy targeted large firms with strong cash flows and high dividend yields. Conoco definitely has the size, and, in addition to that yield, it's generating $11.58 in cash flow per share, more than eight times the market mean. All of that helps it pass this model with flying colors.
I'm long COP and CACI.