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6 Cash-Rich Stocks to Buy Before 2012 - 63168 views
BALTIMORE (Stockpickr) -- If the recent volatility and selling in the broad market have taught investors anything this summer, it’s that cash is still king right now. But holding cash in your portfolio is only part of the equation -- more than that, I’m talking about cash in corporate coffers.
Right now, corporate profits are at an all-time high, and so are corporate holdings of cash. By and large, firms have been sitting on their cash in 2011, opting to hold on to significant balance sheet liquidity rather than put it to work on acquisitions or dividend payouts.
That could be about to change, though.
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Last month’s selling has spurred an increase in M&A activity as firms scope out bargains among potential acquisition candidates. In a sense, major corporations have the potential to be the ultimate value investors; when stock valuations are discounted to fundamentals, they’re able to unlock value almost instantly by buying out a cheap company and bringing its assets and profit stream onto their own financial statements. In short, this is a perfect environment for cash-rich companies to add substantial shareholder value.
At the same time, investors are starting to demand more dividend income from their equity holdings. That sentiment swing could spur more payouts from companies who aren’t doing anything with their hefty cash reserves.
To take advantage of the opportunities presenting themselves in cash-rich stocks, here’s a look at six names that currently hold significant net cash positions in this market.
I can’t even start to discuss cash-rich companies without bringing up Apple (AAPL). Back in July, with debt-ceiling debates raging on Capitol Hill, Apple actually held more cash in its accounts than the U.S. treasury -- a $76.2 billion position in cash and available-for-sale securities (that number includes long-term marketable investments as well). Essentially, that means that $82 of Apple’s share price is made up of its cash position.
And that means that, taking out the value of Apple’s cash, the company’s TTM P/E ratio is currently 11.88. So best-in-breed tech stock Apple is currently trading for an earnings multiple that’s 56% lower than the average tech sector stock. Granted, there’s reason to be anxious about a large position in Apple -- visionary CEO Steve Jobs just stepped down from the corporate helm, and the stock’s 46% rally in the last 12 months is understandably scary for investors who are worried about overpaying in this market. But on an absolute valuation basis, Apple’s still cheap,
Apple doesn’t pay dividends. And its acquisitions have historically been smaller firms that are accretive, not transformational to the company’s core business. Some analysts are suggesting that Apple could start issuing a dividend, and while I think that a buyback is a likelier way for new CEO Tim Cook to return value to shareholders, it’s certainly not impossible to Apple to start shoveling out checks.
Frankly, this stock’s balance sheet makes it look like a good deal regardless of how it handles its cash position.
Believe it or not, General Motors (GM) is another name that’s sitting on an ample cash position in 2011. While it seems shocking that the same company that crawled (or rather jetted) to Washington for bailout cash in 2008 could have excess cash reserves, the company’s bankruptcy left it on solid financial footing, with $36.5 billion in cash and securities and just $5 billion in debt.
That doesn’t mean that GM is living the high life just yet. That automotive debt number doesn’t include a $9 billion pension shortfall, but that concern may be academic at this point. GM has been carving away at that pension obligation, which weighed in at $17 billion as recently as 2009. The firm’s re-emergence into profitability should help to minimize that number in the next couple of years.
Meanwhile, GM is working on pushing attractive product offerings to consumers. Sales are starting to grow at a significant pace, and coupled with much-improved costs, that’s contributed to considerable cash flow generation capabilities. Ultimately, GM’s cash position could factor into its ability to speed the U.S. Government’s exit from its ownership position in shares -- it means that the capital markets are going to be much more receptive to an influx of new shares.
While GM still has a way to go before it’s at full speed, this isn’t the same stock pre-crisis investors got hammered on.
Dell (DELL) is another tech name that’s sporting a cash-flush balance sheet right now. As of its most recent quarter, the firm is holding $15 billion in cash and short-term investments, plus another $1 billion in longer-term securities -- a $16 billion position that greatly offsets a $6.4 billion debt load. That puts the firm’s cash-adjusted P/E at a mere 4.64.
That may be an incredibly low price multiple, but investor should be aware that the muted P/E is somewhat justified. Dell’s core business is still computers and computer products, a business that’s significantly commoditized these days. Dell’s margins are paper thin, and its competitive advantage is limited. To counter that, management has been pushing towards building its enterprise IT business, a crowded space that’s been getting attention from every other major PC maker.
All of that said, while limited growth potential does temper the stock’s P/E, Dell’s really cheap right now.
Management has been deploying some of that cash lately, adding shareholder value with a recently announced $5 billion share buyback program. In total, the buyback covers nearly 20% of Dell’s current market value. If the company is aggressive while shares remain cheap, it would dramatically benefit shareholders.
The tech sector’s penchant for hefty cash balances continues with Google (GOOG). The search giant has been known for its aptitude for acquisitions, most recently with the firm’s decision to buy Motorola Mobility (MMI) for $40 per share in cash last month. Even though stock valuations have been hammered this summer, Google hasn’t been bargain hunting -- the acquisition represented a 63% premium to MMI’s previous closing price.
But the company has the wherewithal to handle the big price tag. Google’s sitting on roughly $40 billion in cash and available-for-sale securities, a serious net cash position given the firm’s mere $3 billion in long-term debt. Obviously, the MMI acquisition changes those numbers appreciably.
Google is still the league leader in paid search, a business that’s particularly compelling given the ability of online advertisers to attribute ad spending to specific transactions. Because of the high level of transparency from ad click to online purchase, firms are willing to spend significant amounts of cash on Google’s products provided that the payoff continues to make economic sense. That’s a major economic tailwind that investors will want to be part of as long as internet penetration continues to tick higher worldwide.
Google’s shareholders will just need to make sure that the firm doesn’t deviate too far from its core business until it can justify side projects with meaningful returns on investment.
Qualcomm (QCOM) is a debt-free communications stock that rounds out our list of cash-rich companies for this week. The firm currently has a $5.26 billion cash
position and another $14.5 billion in AFS securities.
That cash comes from a strong mobile device industry that essentially pays Qualcomm a licensing fee for nearly every 3G and 4G phone on the market today. Because the company’s robust intellectual property portfolio is mission critical for tech companies who want to put out the next hot smartphone, it benefits as the industry as a whole grows. Qualcomm’s biggest business is still in providing chips that help those devices work. While considerable competition does pose some serious challenges over the next few years, the company’s licensing revenues at least offer some semblance of a fundamental backstop.
A history of dividend hikes means that this firm is well suited to paying some of that cash back to shareholders right now.
Qualcomm, a holding in portfolios such as Julian Robertson's Tiger Management and Lee Ainslie's Maverick Capital, shows up on a list of
Top Stocks With the Most Hedge Fund Action in the most recently reported quarter.
Consulting giant Accenture (ACN) is deeply entrenched in providing its expertise to big business. The firm counts 96 of the world’s 100 biggest companies among its clients, with a geographic footprint that spans 50 countries.
Service-based businesses are typically capable of generating impressive cash flows, and Accenture is no exception. The firm’s nearly 10% net margins have left the company with a $5.3 billion cash position and no debt.
Accenture does a good job of reminding clients why they should keep its consultants around. The firm’s long-term relationships are built on its ability to justify its presence through increased efficiency or revenue generation ideas -- and its strong pipeline is a testament to that fact, particularly in recent years when companies have been trimming discretionary spending en masse.
Accenture has a consistent track record of returning value to shareholders in the form of buybacks and dividend hikes.
To see these value-centric names in action, check out the Cash Rich Buys 2011 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.