12 Stocks with Lots of Cash

There have been a number of portfolio managers who have been quoted as saying that the safest companies to invest in these days are the ones that don't need to continually go to the credit markets to fund their businesses. These are companies with substantial piles of cash that should allow them to ride out this recession without having to pay exaggerated borrowing costs in today's credit markets.

Though corporate bond issuance is currently robust, spreads are still quite high with the yield on double-A bonds more than 3.5% higher than comparable Treasuries. This is better than last year but significantly worse than the historical average. For bonds that are rated less than double-A, terms get even tougher and demand is correspondingly weaker.

I ran a screen this weekend (all numbers are as of Saturday morning) to identify those companies with big cash stockpiles. Rather than look at the absolute value of cash, I looked for those companies whose price to cash ratios appear to be quite favorable. I divided market cap by cash to obtain the rankings. In order to narrow the list down to a small number, I looked for companies where the stock price to cash ratio was 0.5 or less. With the government backstopping everything in sight, I felt it was reasonable to consider "cash" to be cash on hand combined with short-term investments.

The following twelve companies were picked up in this screen:

Note that Goldman Sachs (GS) has the largest cash hoard by far on this list. It is ironic that, despite all the cash they have, they are willing to dilute existing shareholders by raising more cash in a $5 billion common equity offering so they can pay back the government's TARP funds. I guess we have yet another tone-deaf bank CEO...

Aside from the issues surrounding Goldman, though, a screen like this is intended to highlight stocks that are selling for less than the cash on their books. In essence, then, this is a value screen that should identify stocks that are cheap. Note that this view of "cheap" doesn't necessarily equate to low Price-Earnings ratios though the Price-to-Book ratios are pretty much all quite reasonable for this batch of stocks.

If I had to pick one stock on this list that looks kind of interesting, I guess I would have to go with Interactive Brokers (IBKR). In terms of its credibility as a value stock, it has a modest PE, very low Price-to-Sales (as is common for financial stocks), low PEG and a modest Price-to-Book ratio. Its Debt-to-Equity ratio is also low while its Cash Flow Yield is quite high. As a financial stock, Interactive Brokers has seen its stock plunge from the $30's to the teens. The company, not being a bank, has no investments in any toxic assets and makes its money on the volume of trades that it handles. As markets perk up, so should revenues at this company. In the meantime, it has a nice pile of cash and should be able to comfortably ride out this market downturn.

Next time...

In retrospect, it seems that using a Price-to-Cash criterion of 0.5 is rather extreme; hence the small list. Next week I will look into expanding this criterion to accommodate a Price-to-Cash ratio of 1.0 but leave out some of the micro-caps. This should leave us with a more manageable list of companies.

Disclosure: none

Comments

[discov:]

concisetrading.blogspo.../ If that trendline breaks on the S&P, then be careful about your timing buying even cash rich companies.

Apr 16 01:16 PM

[doubtful:]

My question would be 'What are they going to do with that cash?
If there is no viable business plan and capable management it probably will be squandered or remains dead capital. However you have to respect somebody with a large cash hoard in these difficult times. Needs a lot of research.

Apr 16 01:38 PM

[aarc:]

Thanks for the list.

After 18 months of unrelenting sell-off; I was starting to think that SA is the territory for bear huggers rather than those who are looking for alphas.

With cash hoarding, those companies are among the first to be able to capitalize when the economy recovers while those companies with more or less cash but with more credibility will be able to borrow much more cash than those without credibility for business expansion.

Overall, those companies without credibility are the ones that have been crushed so badly during this downturn and will be able to appreciate 10x, 20x or even 50x from their bottoms just by symphatically going with the trend once the trend to the upside resumes. But they are not expected to be able to recover their full price to the top in a very short period of time unlike those companies with high credibility.

For example, GS, JNJ and AMZN have considerable credibility and will be able to recover to their full price or more in less than 5 years once the economic recovery starts. But that will result in 2x to perhaps even 5x price appreciation.

While BHO, FORTY, GSIG, or even cash strapped firms such as SIRI, S, ETFC, PIR among others, if they survive, will require considerable time of perhaps decades before they can recover to full price at their tops, if ever.
Meanwhile, in 5 years time during economic recovery, they can easily make 5x to 10x or a lot more just by reluctantly rallying in sympathy with the general markets. This is because they are basically extremely volatile stocks while at the bottom thus rallies in the order of 10% to 20% or more in a day are quite common while the less volatile stocks such as JnP will be lucky to make 2%.

Those with known history to recover despite severely dibilitating circumstances such as AMR and MSO are the ones I believe will have the capability and ability to recover much faster due to their previous experience.

Apr 16 06:59 PM

[StockBlogger:]

Are your cash balances correct? I was just looking at Interactive Broker's net cash at the end Q4 2008 (12/31/2008) and it shows that they had ~$943million in cash. Your chart says that they have ~$5.9billion?

Apr 16 08:40 PM

[StockBlogger:]

Also just did a second check to make sure my numbers weren't off for some reason so I checked GS. According to their Q4 numbers GS had ~$15.7billion in cash rather than the ~$122.4billion that you reported above? This is probably the reason why they raised $5billion in capital, if they had $122.4billion in cash they would have never needed to borrow TARP funds...

You may want to recheck all of your numbers or maybe I am missing something?

Apr 16 08:50 PM

[msgtb:]

You picked GS and how do you know what their debts are since we have mark to fantasy. How many CDS's do they have? Buy any financial stock at your own risk. I would not consider Interactive Brokers a financial stock. The worst is not over!

MSGTB

Apr 17 12:17 PM

[William Cowie:]

GS is a bad examples for several reasons:

$12 billion in cash received as 100 cents on the dollar AIG payout (courtesy of us, the taxpayers)

$10 billion in TARP money

$5 billion in Warren Buffett money raised - quite expensive (for Goldman) at 10% per year, plus warrants for stock.

They keep assuring us they didn't need a penny of this money. Do they just raise money because it feels good then?

This is where it gets interesting: if you raised $5 billion, do you think your stockholders would prefer paying off half the expensive Buffett debt? Of course not! Your stockholders would rather you pay off the cheaper TARP money, because that will stop the scrutiny of your $67.8 million paycheck!

Speaking of this little $5 billion stock issue. The stock price surged very nicely when they announced their lovely Q1 earnings of $1.2 billion. Small detail: GS changed their financial year-end from November to December at the end of 2008. This created an "orphan" month, which they used to stuff $4.8 billion of write-downs into. Interesting that the quarter following this humongous write-down they made even less than that amount. And that's AFTER adopting the mark to fantasy accounting rules. Goldman may have cash, but they sure don't have any scruples when it comes to shafting their stockholders...

Apr 17 08:18 PM

[ArtfulDodger:]

Good list for stock pickers to begin their research. Thanks.

Apr 18 09:51 AM

[cayman4444:]

THANK YOU! Virtually every time some investor or business pundit blogs about some co's cash horde they almost always ignore debt.
I think some nitwit said recently you could buy GM for $1B, but they completely ignore the $33B in DEBT!


On Apr 16 03:34 PM Steve Pluvia wrote:

> Can I ask a stupid question? Why screen just for cash? Who cares
> how much cash they have if their current debt is 30x their cash...
> Kinda makes the cash irrelevant eh?

Apr 18 04:47 PM

[bloggsy:]

Presumably most of the cash held by GS, Interactive & MS actually belongs to their customers, ie there is a corresponding liability?

Apr 23 07:29 PM