(By David Sterman) Shareholder activists hate to see a company with too much cash. They rattle cages in hopes of getting a company to issue a one-time hefty dividend
, or make some other bold move that can shake up a stock. But many companies simply refuse to listen. They know the economy
cycles up and down, and they like to keep cash on hand for the next rainy day.
Well, with share prices across the stock market in free-fall, that rainy day has arrived. Cash piles are now so large -- especially in the context of quickly-falling stock prices -- that it may be time to put that money to work. As an investor, you should be looking to put your money into these types of companies, because they are best positioned for downside protection in a rough market -- and have plenty of ammo to boost shares.
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I did a little digging and was amazed to find out how many cash-rich companies we're talking about. Looking at the 1,500 companies that make up the S&P 400, 500 and 600, nearly 10% of them now have net cash levels worth at least 20% of their market value. And you don't need to focus on tiny, little-known companies to find these cash hoarders. Using $500 million as a minimum market value, and tightening that cash threshold to 25%, you can still find 56 companies that fit the bill, including names I'm a big fan of, such as Cree Inc. (Nasdaq: CREE), Google (Nasdaq: GOOG), Analog Devices (NYSE: ADI) and Polycom (Nasdaq: PLCM).
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Remarkably, there are more than two dozen companies that have net cash that equals at least 33% of the company's market value. At some point soon, these companies may look to support their flagging stock prices with a buyback, an acquisition or a dividend boost. At a minimum, the huge cash balance gives some support to shares -- a key consideration in this panicky market.
It's no coincidence that the list is dominated by tech stocks. These companies always have a predilection for generating cash, though strong cash flow in recent years has left these companies with arguably too much cash, with more than enough money to handle any challenges an economic slowdown may bring.
Of course, some of these cash-rich tech plays, such as Dell (Nasdaq: DELL) and Cisco Systems (Nasdaq: CSCO) have recently delivered tepid quarterly results, and there are few reasons to expect these stocks to be bid up right now, except for their pristine balance sheets. All they can do is make the best of a bad situation. For Cisco, this means continued stocks buybacks, which have already shrunk the share count in dramatic fashion.
A solid chip play
Yet there are some tech stocks with solid catalysts in this group. Take Nvidia (Nasdaq: NVDA) as an example. The chip maker is in the midst of a major push into the smartphone segment with the third generation of its Tegra chip, which has been designed into 30 different phones hitting the market this year.
Management thinks 25 million of these chips will ship this year, roughly double the amount shipped in 2011. The smartphone chip market has historically been dominated by Qualcomm (Nasdaq: QCOM), though a design win with Verizon (NYSE: VZ) and a number of Asian phone makers should make Nvidia a fast-growing number-two player in this market.
Shares of Nvidia have slumped to an 18-month low to a recent $12, though analysts at Needham see shares rebounding to $20. That's solid potential upside, with the company's net $5 a share in cash providing downside support.
Not just tech
Health care providers also seem to be trading on the cheap in relation to their cash positions. Take Humana (NYSE: HUM) as an example. After falling roughly 20% since the year began, the company is worth $12.4 billion on the market -- not much more than its $11.3 billion net cash position. Why so much cash? Because regulators like to see insurers maintain stable financial positions, but management appears to have overlooked the fact that rising annual cash flow has let the cash balance grow unchecked. It stood at just $5.4 billion at the end of 2008.
Management finally understands the need to put that cash to use, recently telling The Wall Street Journal that Humana may pursue acquisitions that bolster the company's presence with Medicare. A quicker way to satisfy investors? Beef up the dividend, which currently yields just 1.4%. With more than enough cash in place already, Humana could conceivably earmark all future cash flow toward the dividend and instantly create a 15% to 16% yield. Even a 6% dividend yield would keep most of the company's cash flow in house.
Risks to Consider: Management of these companies may look to make acquisitions with all of that cash, a move that is not always welcomed by investors. Dell, for example, has been an acquisition machine, and has little to show for it.
Action to Take --> The market sell-off is creating deep values, and the balance sheet is a fine place to start your research. These companies have built up embarrassingly high levels of cash, and the balance sheets now stand in stark contrast to the share prices. These stocks could fall further in this tough market, but the cash positions should cushion any blow.
-- David Sterman
David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of CSCO, CREE, GOOG in one or more if its "real money" portfolios.
This article originally appeared on StreetAuthority
Author: David Sterman