When the Starting Pistol Fires

 | Jan 03, 2012 | 7:30 AM EST  | Comments
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cree

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AMAT

"Cash is king" -- so the saying goes. If you have it, lots of opportunities become available, and that's why many of Wall Street's most successful investors favor companies with boatloads of it.

The legendary Benjamin Graham famously said a company's current ratio -- current assets divided by current liabilities -- should be 2:1 or better. This is a measure of liquidity, and no asset is more liquid than cash.

These days, many companies are stockpiling the green at a remarkable rate. A year ago, in a report about dividends, J.P. Morgan said U.S. companies are hoarding more cash today than they have been since the 1950s, and cash levels have likely increased even more since that point.

When you buy a stock, you are paying for the company's cash. Take Apple (AAPL) for example. Its market capitalization is $376 billion, and the company holds about $82 billion in cash and short- and long-term investments. This means that about $0.22 out of every $1 of market cap is for the cash and cash equivalents held by Apple -- not its actual business, its products, its good name, its intellectual property or its prospects.

Being flush with cash not only means the financial means to take advantage of business opportunities. It also means the investor's risk is generally lower, given that the company's assets sport a lower relative ratio of less liquid or hard-to-value assets.

Given these trends, it should be no surprise that cash comprises a significant percentage of the market cap for many companies. In light of this, I've just identified firms whose market cap has at least 40% cash ratio -- and I've found several that also earn high grades from at least one of my guru strategies. These are computerized strategies I created that mirror the thinking of some of Wall Street's best investors.

The following, then, are companies with solid businesses, as evidenced by their strong showing with the guru strategies, and whose downside risk is limited by the large size of their cash holdings.

Forest Laboratories (FRX) is a pharmaceutical company whose cash holdings represent about 47% of the company's market cap.

It's no surprise that my Benjamin Graham strategy likes this company. After all, the company is highly liquid, a fact valued by Graham. The strategy likes Forest's high revenue ($4.6 billion), and current ratio (3.58:1), modest price-to-earnings ratio (10.8) and lack of debt.

My Joel Greenblatt strategy also gives Forest high grades. This screen ranks the company's earnings yield and its return on capital when compared with all the other stocks in the market, combining the two measures into one final ranking. Forest is ranked ninth for its earnings yield, 213th for its return on total capital and 22nd overall. This is an impressive ranking, given that it's being tested against several thousand stocks.

Cree (CREE), whose cash represents 43% of its market cap, makes light-emitting diode (LED) chips. Peter Lynch created a strategy that I automated, and it is this one that believes Cree will continue to shine brightly. The most notable variable used by this strategy is the P/E/G ratio, which is the P/E ratio relative to earnings -- a measure of how much the investor is paying for growth. A P/E/G of 1.0 or less is acceptable for this screen, and Cree's is 0.90. Also in its favor: zero debt.

Another stock to consider is Applied Materials (AMAT), whose cash holdings come to 44% of its market cap. The company is the world's largest supplier of chipmaking equipment, and it also sells equipment used to make flat-panel displays and solar photovoltaic products. This is also a Lynch favorite, as its P/E/G is an impressive 0.45, while debt is modest.

Given the cash piles and fine collective performance of these three companies, any one could be a good start for your 2012 investments.

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