9 Intriguing Cash-Rich Tech Plays

by: StreetAuthority

by David Sterman

The S&P 500 pushed back above 1,100 in September 2010, past the 1,200 mark in early December and is already on the cusp of 1,300. With that kind of upward move, it's reasonable to feel cautious. You want to participate in this impressive rally, but don't want to give up big gains if the market shifts direction. That's why defensive stocks make real sense right now. [My colleague Tom Hutchinson agrees.]

I'm not talking about low beta stocks that tend to ignore market gyrations. I'm talking about stocks with plenty of cash. Cash serves as a backstop in tough times and a competitive weapon in good times. And no sector is sitting on mountains of cash like the tech sector.

Surprisingly, even after this sharp upward move in the markets, a number of tech stocks hold enough cash to account for a decent chunk of the entire stock market value. The table below highlights nine tech stocks that sport at least 25% in their market value in net cash.

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Will these companies go on a buying spree (either of other companies or their own stock)? Or might they hang onto that cash to weather any upcoming pullback in the economy? Either way, it's nice to have such options. Let's look at some of the most intriguing cash-rich plays among these tech stocks.

A brief recap...
I've covered a few of these names in the recent past. I recently noted that Earthlink (Nasdaq: ELNK) has developed a misunderstood, but potentially lucrative business model as it moves away from being a dial-up Internet access provider.

I discussed Dell's (Nasdaq: DELL) prodigious cash flow that complements its hefty cash hoard back in November. Dell is still a company in search of growth (perhaps enabled by a recent acquisition spree), but its balance sheet remains stunningly strong. Cash could account for more than 40% of its market value by the end of 2011.

Two more candidates
It would be awfully tempting to get behind Comtech Telecommunications (Nasdaq: CMTL), as this provider of satellite and microwave communications systems remains nicely profitable, even as it enters a cyclical slump which will likely lead to a 20% drop in sales this year. But it's unwise to spend time on stocks that lack any near-term catalysts, and aside from a current stock buyback, there are few timely virtues. Nevertheless, keep an eye on the M&A space. Some investors suspect that Comtech will be a buyer or a seller in 2011.

Verisgn (Nasdaq: VRSN) highlights a tangible benefit that a bulletproof balance sheet can bring. In late December, it paid out a $3 a share one-time dividend. And it could afford to do so several times more in coming years if it so chooses.

An intriguing small business play
My favorite name in this table is Intermec (NYSE: IN), which is a leading player in the field of barcode scanning, right behind Motorola Mobility's (NYSE: MMI) Symbol division.

A wide range of retailers, along with companies operating massive warehouse / logistics operations, use these scanners to track goods as they work though the supply chain. Thanks to the economic slowdown, many customers decided to hold off on scanning system upgrades, leading Intermec to post a 25% drop in sales in 2009. Sales were flattish in 2010, but a recently rising backlog along with feedback from customers implies that sales could rebound 10% in 2011.

This is known as a "late-cycle play," as Intermec's customers tend to invest more heavily in capital spending when an economic rebound is fully underway. A bullish sign: Intermec just announced that 2010 fourth-quarter sales came in ahead of prior forecasts. The company also announced an acquisition of Vocollect Inc., which will enable workers to use voice commands to track goods as they move through the warehouse. This should enable a truly "hands-free" environment, yielding productivity gains in the warehouse.

Intermec also holds an interesting wildcard that may be overlooked by many investors: The company owns a wide range of patents in the field of radio frequency identification (RFID), which allows for more advanced forms of asset tracking. The technology has not supplanted barcodes as many had expected just a few years ago, but it is starting to make serious inroads. Intermec stands to collect hefty royalty streams if RFID becomes even more widely adopted.

Back when RFID was in the spotlight in 2006 as a key emerging technology, Intermec's shares hit $35. These days, shares trade for a third of that value. A rebounding core business, an appealing new acquisition and a potential RFID kicker could be what Intermec finally needs to break out of its current two-year trading range. It's hard to pin specific upside for these shares, although a rebounding economy could set the stage for a sustained double-digit rebound in sales and even more robust profit growth.

You can sleep better at night with these cash-rich stocks. And although Intermec is my favorite on this list, any one of these strong balance sheet stocks should provide ample downside protection even if the market swoons.

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Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.