- 5 Big Stocks to Trade for Gains as QE3 Ends
- How to Trade the Market's Most-Active Stocks
- 4 Big Stocks Making Headlines -- and How to Trade Them
- 4 Stocks Breaking Out on Big Volume
- 5 Stocks Spiking on Unusual Volume
5 Cash-Rich Stocks to Buy in 2012 - views
BALTIMORE (Stockpickr) -- If yesterday’s unceremonious selloff of nearly every asset class reminds us of one thing, it’s that cash is still king. In yesterday’s session, the pullback sent the S&P 500 down 1.54%. It also sent alternative assets like gold down even more as anxious investors piled into the dollar.
Holding cash in your portfolio is one thing, but focusing on companies that hold cash on their balance sheets is yet another.
As the 2012 rally heated up, it was easy to eschew companies with lots of cash in favor of higher-risk stocks that could move faster. But investors who took that high-beta route have gotten their clocks cleaned in the past few trading days -- and let’s not forget that the most recent pullback pales in comparison to the corrections we were faced with just a few months ago.
Right now, corporate profits and corporate cash holdings both sit at all-time highs, a factor that could directly line up with shareholder profits in 2012. After all, firms with cash can opt to increase shareholder value by paying a dividend or initiating a share buyback. Plus, they have the ability to take advantage of pricey M&A opportunities and internal investments.
But don’t think that cash is some sort of a drag on investment performance.
Since we last took a look at cash-rich firms six months ago, the six names I talked about rallied an average of 19.22%. That’s around a third better performance than “buying the market” would have earned you.
To take advantage of the opportunities presenting themselves in cash-rich stocks, here’s a look at five stocks that currently hold significant cash and little to no debt.
The sole holdover from six months ago is Apple (AAPL), the nearly $500 billion tech giant that recently earned the title of the most valuable company in the world. While there’s certainly no shortage of analyst eyes on this firm, I think that the unique situation in shares still warrants taking another look.
It sounds unbelievable, but Apple currently has more than $97.6 billion in cash and long-term investments. To put that in perspective, that means that around 20% of the firm’s market capitalization is paid for in cold, hard cash. So even though this stock has been rallying hard for the last few years, if you factor that behemoth cash position out of its valuation, suddenly this $500 billion stock starts to look “cheap.”
To be sure, there are a couple of new black clouds that have emerged since the last time we took a look at Apple’s cash; the loss of Steve Jobs in October has investors wondering if Apple can continue churning out amazing products without its visionary co-founder at the helm, and the majority of institutional investors own large positions in the company, creating a potentially crowded trade.
Even so, it’s hard to argue with the fact that Apple continues to deliver impressive fundamental performance and stuff more cash into its coffers. That CEO Tim Cook has hinted at the possibility of a dividend payout is a very good sign as well.
With Wall Street tuning into Apple’s media event for a possible iPad 3 announcement today, this week’s pullback could be an especially good time to build a position in Apple.
No. 2 U.S. oil company Chevron (CVX) is another firm that’s been adding onto its cash pile in the last few years. The company is a supermajor that produces more than 2.76 million barrels of oil equivalent per day, buoyed by far-reaching reserves and a well-positioned refinery network.
The integrated nature of Chevron’s operations helps the firm squeeze out deeper margins across its business -- and more cash for its balance sheet. At last count, Chevron’s net cash and investments weighed in at $33.13 billion.
One feather in Chevron’s cap lately has been its production mix. With around 70% of production coming from oil, the company has been able to profit from the sustained high crude prices of late without the earnings drag that’s come with excessive natural gas exposure. While there’s reason to believe that substitution could drive nat gas prices upward, Chevron’s adequate (and slowly increasing) exposure to the commodity means that it wouldn’t miss out wholesale on a spike in gas prices.
While it’s challenging for Chevron to materially add to its massive capacity, the firm has enjoyed market-driven tailwinds in the last couple of years as oil prices climbed higher. The challenge for this firm is going to be avoiding pulling the trigger on projects that are just barely economically viable at the high crude prices that CVX is able to collect. 2008’s collapse in crude prices should be a fairly fresh reminder of the consequences of investing in high-cost oil projects.
A nearly 3% dividend yield means that Chevron is paying out some of its cash reserves to investors. Income investors should consider CVX a good core energy holding.
Johnson & Johnson
Johnson & Johnson (JNJ) is the prototypical blue chip stock. Not only does this $180 billion healthcare firm boast a diversified business and enormous scale, it also enjoys a huge cash position: around $12.63 billion in net cash and investments graces JNJ’s balance sheet at last count.
Johnson & Johnson’s business includes everything from consumer products like Band-Aid brand bandages to pharmaceuticals and medical devices. While pharma makes up a large chunk of the firm’s net income, the consumer and medical device segments offer investors diversification that few big pharma names can match -- especially as patent drop-offs plague valuations in the industry.
Part of Johnson & Johnson’s blue chip status comes from the dividend that the firm pays out – it currently rings in at a 3.54% yield. While that’s on the high side, some of that pricing is based on projected patent losses.
Even so, with a strong pipeline and adequate “dry powder” for 2012, JNJ should continue to offer an impressive payout.
2012 has been a good year so far for shareholders of Western Digital (WDC) -- the hard drive maker has rallied more than 20% since the first trading day of January. Much of that success has come on the heels of good earnings performance and scale; the pending acquisition of Hitachi’s hard drive business makes Western Digital the world’s biggest computer storage firm.
There are some longer-term tailwinds benefitting WDC right now, even if growth had been harder to come by during the recession. The computer industry is undergoing a transformation in storage technology as users embrace cloud computing, and one major byproduct of that is ramped-up demand for hard drive storage to fuel their datacenters. As data needs continue to increase, WDC should continue to see its sales increase in kind. That argument only gets accelerated as WDC is able to sell a larger proportion of high-margin drives used in datacenters.
Right now, Western Digital holds $3.7 billion in net cash and investments on its balance sheet, a number that accounts for nearly half of the firm’s market capitalization. While much of that cash is set to disappear when the Hitachi acquisition closes this month (it’s expected to close tomorrow) M&A is one of those opportunities that drew us to cash-rich companies in the first place.
As WDC’s scale balloons, expect increased margins to come with it.
Western Digital shows up on a lists of 10 Best Revenue Growth Stocks for 2012.
National-Oilwell Varco (NOV) is one of the biggest oil well equipment firms in the business, providing E&P firms with everything from rig drilling equipment to consumables used in the process of pulling oil out of the ground. Because NOV is the standard bearer in the rig equipment market, the firm should benefit immensely from the increased rig drilling activity that’s expected to take place worldwide in 2012.
All told, NOV’s offerings can be found on around 90% of the world’s oil rigs. That scale provides two important benefits for the firm: It enables NOV to operate with very low costs, and it means that the firm already has existing relationships with most of the industry’s key players. Both of those factors help to contribute to the double-digit net margins that NOV currently produces.
From a financial perspective, NOV is in stellar shape, with a net cash position of $3.42 billion. That balance sheet liquidity contributes around 10% of NOV’s market cap, and – more importantly, it should help to keep the firm from turning to the capital markets for liquidity if oil drilling runs into any short-term speed bumps.
Nationa Oilwell Varco shows up on a recent list of 15 Best Stocks at Top-Performing Mutual Funds.
To see these value-centric names in action, check out the Cash Rich Buys 2012 portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.