I get tired of reading daily articles about potential market corrections or double dip recessions. The financial media (CNBC, Finance Yahoo, Bloomberg) spends more time guessing where the market is headed in the short-term with little or no mention as to what the underlying fundamentals are telling investors. Graham, Buffett, and Lynch have correctly taught investors to avoid trying to “time” the market, but instead invest when the underlying fundamentals are favorable. There will always be a chance of the market declining another 10% or 20% in the short-term, but if long-term fundamentals are solid, then don’t hesitate to make substantial investments. Arguably the most important fundamental an investor can analyze is cash and cash flow. So, I pulled the most recent three years of cash and short-term investment balances of the DOW 30. I excluded Bank of America and JP Morgan from the analysis since both had significant fluctuation in cash and short-term holdings. In total, cash and short-term investments were 42% higher than last year and 23 of the 28 remaining businesses had higher cash holdings than the previous year.
Businesses with substantial amounts of cash and cash flow are able to invest in projects, repurchase shares, and/or pay dividends. Great businesses can stockpile cash for some period of time, but at some point, they must put cash to use. When they do, business will pickup and earnings will follow. With cash balances high and cash flow still pouring in, it’s only a matter of time before companies decide to stop earning little to nothing on their cash and start allocating money to profitable projects or return cash to shareholders. No matter which way they choose to spend their cash, the overall economy will benefit when they do.
Disclosure: Long HD, HPQ, INTC, JNJ, KO, KFT, MSFT, PG, WMT, XOM