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Buy These 5 Cash-Rich Stocks to Triple Your Gains - views
BALTIMORE (Stockpickr) -- Cash is still king in 2013 -- I bet you haven't heard that phrase in a while!
But it's true. Cash still matters, even in a market that's up 15% year-to-date -- and even in an interest rate environment where cash is cheap to borrow. You don't have to take my word for it; over the last decade, the top tier of cash-rich stocks worldwide generated total returns of 297%.
That's triple the S&P 500's performance over that same time period. And it includes the biggest drawdown in most investors' lifetimes.
Part of that stellar outperformance has to do with what cash enables companies to do. Capital gains are great, but historically speaking, the majority of portfolio growth comes from other sources. Dividends, share buybacks, and debt repurchases all inject value directly into your shares, and on a year-to-year basis, they also account for around 50% of annual stock performance. Only companies with cash that have the wherewithal to boost those payouts on command.
In short, cash provides options. 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.
Lots of companies have big cash positions right now. In fact, more than 20% of the S&P 500's valuation is made up of the record cash holdings on corporate balance sheets. That means that it pays to be a little more selective with which companies you consider cash-rich.
To do that, we'll focus on firms that fit the tight set of quantitative criteria that beat the S&P by a factor of three. Today, we'll take a look at five of them.
General Motors (GM) hasn't exactly been known for its financial staying power in the past. The firm went bankrupt in the middle of the Great Recession, flailing publicly as its balance sheet dried up. But the new GM is a very different animal. One key difference is the massive amount of net cash that the firm has on hand. After wiping out debt, General Motors still carries $15.47 billion in cash on its balance sheet; that's enough to cover 32% of the automaker's market capitalization.
GM has made leaps and bounds since 2008. The firm shed unprofitable brands and significantly improved its build quality, churning out cars that are dramatically more competitive with their Japanese rivals than ever before. While the U.S. is the largest car market in the world, it's far from GM's biggest business. Nearly 70% of GM vehicles are sold outside of North America today, with a huge share coming from emerging-market countries such as China and Brazil.
To be fair, GM's cash position isn't exactly available for shareholders to plunder the firm still carries a large underfunded pension post-bankruptcy that doesn't show up on its balance sheet. That pension fund will require some big payouts in the next few years, but it's far more manageable today than it was a few years ago. So is GM's break-even; while profitability was a pipe dream before bankruptcy, it's at a much more comfortable level today.
GM's cash position gives it options in 2013. And for a capital-intense automaker, that's key.
It shouldn't come as a surprise that Apple (AAPL) is on our list. The firm has a reputation for holding more cash than any other even more at one point in 2011 than the U.S. Treasury in fact. At last count, Apple's cash stood at more than $144.5 billion, with minor offsetting debt. Only around $12 billion of that is actually true net cash the rest is long-term liquid investments managed by Apple's in-house investment firm, Braeburn Capital.
Yes, when you have that much cash on hand, you need your own treasury management firm.
It's been a big week for Apple. Yesterday, at the firm's Worldwide Developers Conference, Apple unveiled a slew of software and hardware updates, including major iterations for its Mac OS X computer operating system and the iOS software that fuels Apple's mobile products. Subjectively, the upgrades look impressive -- almost as impressive as the stats that CEO Tim Cook mentioned during the keynote. A refreshed Mac Pro workstation is a particularly important direction for the company, as it renews its longstanding relationship with power-users. Professional-grade products may contribute a small amount to Apple's revenues, but they contribute a lot to its product innovation.
While shares dipped after the keynote, that's nothing new -- it's happened for the last four straight years. I've made no secret of the fact that I'm a fan of Apple as a company, just not as a stock (yet). But with the downtrend in shares broken in the last month, buyers may have an opportunity to jump in in the very near-term. From a technical standpoint, I'd be a buyer on a move above $460. From a quantitative standpoint, this stock's cash position is signaling a buy.
Data management firm NetApp (NTAP) is riding the rising wave of cloud computing. Data storage is the firm's bread and butter, and as storage and back-up needs increase around the world at a breakneck pace, NTAP is well-positioned to benefit. Better still, shares are cheap from a valuation standpoint: the firm's $4.7 billion net cash position pays for more than 34% of its market capitalization right now.
NetApp is one of the few pure-play storage firms that have been around for a while. As a result, the firm has the advantage of a large customer Rolodex and an established niche in the data game. Because NetApp's network-attached storage devices can be purchased ad-hoc (rather than as part as a major datacenter overhaul), it's an ideal vendor for firms whose storage needs are gradually increasing (and those who don't want to shell out massive capital for all-new IT infrastructure).
NTAP's stellar balance sheet position gives it plenty of options right now, especially as most smaller computer storage names are in a counter-cyclical period; it means that M&A opportunities remain relatively cheap, and the firm can still add value through acquisitions. As NetApp continues to build out its OEM partnerships and increase sales to its established customer base, investors should continue to draw returns from its stock.
Activision Blizzard (ATVI) has one of the most attractive business models in the video game industry, and that, in turn, has helped build a huge net cash position of more than $4.3 billion more than a quarter of the company's market capitalization. That means that ex-cash, ATVI's price-to-earnings ratio sits at a measly 10 times earnings right now.
Translation: Shares of ATVI are cheap.
Activision Blizzard owns some of the hottest video game franchises in the world, including Call of Duty, World of Warcraft and Diablo. What's unique about ATVI's positioning is the exposure to subscription-based multiplayer games such as World of Warcraft. With WoW, for instance, some 8 million subscribers pay a monthly fee to play the game online with other players in real time. That subscription component provides ATVI with recurring, high margin revenues. And they're sticky too. Because gamers have a massive sunk cost in building characters and attaining status, they're a lot less likely to switch to a competing franchise and restart the process.
By integrating a subscription component into its more conventional franchises, the firm should be able to achieve a repeat performance in terms of revenues. It'll have to act quickly. With slow attrition from the firm's existing subscriber base, it needs to keep innovating and adding onto its gameplay experiences to keep its grasp on players.
Oil and gas supermajor Chevron (CVX) is another cash-rich company to buy in 2013. As the No. 2 oil company in the U.S., Chevron produces around 2.6 million barrels of oil equivalent each day -- and sports proven reserves of 11.3 billion barrels. I'd argue that Chevron currently has the most attractive financial standing of any major oil firm right now. While the industry is hugely capital intense, CVX actually sports a net cash position of $3.2 billion on its balance sheet right now.
While oil prices have been coming down in 2013, they've still remained on the high-end of their historic range. As a result, Chevron has been able to keep more wells economically viable, and earn net profit margins in the double digits. One major advantage for Chevron is its production mix. Today, around 70% of production comes from oil, so while rivals have been piling up on natural gas reserves, CVX has been collecting more for its trouble. That should shine through even more in the coming quarter after the correction in natgas that started in May.
As long as Chevron can avoid the temptation of buying costly projects that are on the very edge of economic viability, it should continue to generate impressive cash flows. Currently, CVX pays out a $1 quarterly dividend that adds up to a 3.28% yield.
-- Written by Jonas Elmerraji in Baltimore.
To see these value-centric names in action, check out the Cash Rich Buys Summer 2013 portfolio on Stockpickr.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.
Follow Jonas on Twitter @JonasElmerraji