Cash Is Not Yet King When it Comes to Market Performance

With the credit crunch upon us, one might expect relative stock market outperformance from cash-rich companies that can finance their own expansions, take advantage of undervalued companies for strategic acquisitions, and ride out cyclical declines in business. According to Financial Times, six publicly held U.S. companies that hold the most cash are (billions USD):

Berkshire Hathaway (BRK.A): 106.1
Exxon Mobil (XOM): 28.2
Apple (AAPL): 24.5
Cisco Systems (CSCO): 19.9
Microsoft (MSFT): 18.7
Google (GOOG): 14.4

Since November (chart above), these stocks as a whole have not outperformed the S&P 500 Index (SPY; left most column on chart). Nor have they outperformed on a year-to-date basis; all, except XOM, are down more than 35%, while SPY is down 39%.

This will be an interesting group of stocks to follow going forward. While they hold an impressive stash of cash to weather economic storms, note that the entire group holds less than half of the $700 bn government allocation to TARP, perhaps obscuring the value of their fiscal prudence.

Interestingly, the greatest prudence belongs to China: three of the top four cash holding companies worldwide are Chinese banks, while China Mobile checks in at number six.

Comments

[rd4sndk:]

It may not be king but it sure as hell allows one to rest easy at night. look for Apple to add another 4 to 5 billion this quarter to its cash position further distancing itself from the all but XOM and Bershire. How significant is this, Apples cash flow is exceeding revenue growth which is above 20%. In addition, it will only improve as Apple ships more and more iphones at rediculously high GM. I suspect that Apple will have above 45billion in cash by end of 2009.

This boggles my mind to think that Apple has exceed the streets Revenue and earnings estaments for the last 5 years, grown cash reserves over 900% and accelarating growth in all of its major markets but managed to only loss market cap of over 60% this year. A year that is marked with many first for the computer, handset and CE markets. You've got to love the way the market values growth.

2008 Dec 31 02:15 PM

[mkreisel:]

I think linking one month stock performance with any fundamental metrics is quite bogus. The number you quoted for BRK.A is also wrong: the 106 billion number must include all equity investments that went down the drain during Q4.

If the author can't get this kind of basic facts right, I have to question the entire premise of this article.

2008 Dec 31 06:43 PM

[mollytjm:]

it's particularly important for tech companies to be cash rich..when they're not, they tend to skimp on R & D, just the place they need to spend. While Apple's cash may not lead to higher stock prices, it will mean that Apple survives this lousy economy and investment in it's stock will eventually pay off...not end up at 15 cents a share.

Jan 01 11:10 AM

[Alan Brochs...:]

A couple of thoughts:

1) The amount of cash in and of itself is irrelevant. What matters is how much cash relative to market cap. Also, one has to be very careful, as sometimes cash on the left side is offset at least partially by an obligation on the right side (often not debt but rather deferred revenues).

2) Picking November as a start date isn't exactly fair. These stocks most likely held up much better in the free-fall in October. In any event, it would make sense to use a longer time-frame - perhaps the mid-July lows, for instance. As the author pointed out, the stocks did do better than the S&P 500 ytd.

Jan 01 01:02 PM

[k45:]

One month MARKET performance only reflects what the stock buyers and sellers are doing and has absolutely nothing to do with the fundamental health and long term growth of the company! It can also be widely skewed by past *market* performance (was the stock excessively bid up in some previous period?)

If you want to do some *serious* studies, look at what cash rich companies have done over five and ten year periods (hint, Berkshire (+43%) and Exxon (+114%) have done quite well vs. the S&P (-26%) over the past ten years).

You are totally confusing short term "Mr. Market" vs. fundamental health and growth. They are not related.

Jan 01 01:23 PM

[PeakOiler:]

Some of you commenters can't read, it seems. One of the comparisons is a two month, not one month comparison; and the other is a YTD comparison. Before criticizing, suggest you get your facts straight.

The point is valid: cash rich iconic companies have simply not outpaced the S&P500 in the 2008 bear market in any meaningful sense, nor during the trading range phase since November 2008. Something to do with babies and bathwater, it seems.

Jan 01 04:34 PM

[Jeffrey Moore:]

while google, microsoft, apple and the like do have a ton of money in their cash confers, they don't have a lot in relationship to their market cap...

goog trades at roughly 7x cash; where as DRAM trades at .75x cash and dcu trades at 1.25x cash. Neither of the companies have any debt to speak of.

It all goes back to intrinsic value of the business, and the relationship of cash to their market cap-with how easy it is to deploy that cash... obviously, it is easier for Google to deploy all their cash than for Berkshire to do so- the same way that a micro cap company could do so a lot more effectively than Google. However, to do so profitably, and at an acceptable rate of return can make things complicated. To compound at 20% is a lot easier with 10K than with 10 billion; that is what the companies you mention face.

thoughts?

Jan 06 11:24 PM

[Ellen O:]

Where did you come up with 106.1 Billion figure being held in cash for Berkshire? It is usually more like 40 Billion? Thanks.

Jan 07 12:03 PM

[geekiegirl29:]

Agree with PeakOiler-Cash Rich companies as well as companies that have traditionally grown steadily are often shunned by the street. Methinks slow and steady growth CEO's & companies are the glammed up, salesy personalities the street has been known to be wooed by-and with any wooing, best behavior is the side these companies show.

The numbers don't lie but as we've all experienced in the past few months, they are often mitigated to solidfy words.

Jan 08 08:05 PM