In all likelihood, a fully-invested portfolio is not having a good day today, although to a true investor it should matter very little what happens on daily basis.
But considering the precarious state of the global economy, I've suggested that although boring to watch, holding cash was valuable to do. The value of holding cash has really nothing to do with safety. The true value comes in its optionality.
When you have the luxury and gunpowder to purchase when others are frantically selling, two good things come your way. First, you are not forced to sell in order to raise cash. Forced selling caused the demise of many investment professionals back in 2088 and 2009. Secondly, cash affords the opportunity to pick up quality businesses at prices that you can only get when sellers are in panic mode.
Boring companies that generate cash flow will ultimately rule the roost in this environment. Like any business, a company that has a high probability of generating cash flow in tough times will eventually grab the attention of investors. Marketing firm Valassis Communications (VCI) fits such a mold.
Valassis distributes newspaper and mail marketing inserts. Anytime you open a newspaper and pull out the coupon section or receive similar items in the mail, it's coming from VCI. Lest you think that the demise of the newspaper will hurt VCI, the business actually benefits from fewer newspapers as that means advertisers are willing pay up to be a part of fewer newspapers. The company is tremendously profitable and at today's low of $19 a share trades for less than 5x EV/EBITDA. Against a market cap of $950 million, free cash flow in 2010 was $437 million, $177 million in 2009, and $72 million in 2008.
Fertilizer giant Mosaic (MOS) is trading for $61 today as commodity prices are plunging across the board. Even so, fertilizer prices continue to remain robust and will likely remain so in the near future. Fertilizer is, after all, food production. Recent USDA reports continue to reveal that food stocks to use ratios are at all-time lows. Farmers are making healthy profits and continue to buy fertilizer. As an added short-term push, Mosaic will become part of the S&P 500 after the market closes on Friday, replacing National Semiconductor (NSM). Index funds will buy MOS in order to rebalance portfolios.
Another good move on a day like today is to sell put options on securities you would like to own. I can't emphasize the "securities you would like to own" statement. Markets are volatile which makes option prices more expensive, so selling is a decent move. Credit card business Visa (V) is enjoying strong tailwinds from a general shift in card transaction in lieu of cash. Whether it's debit or credit, Visa wins. Since the business holds little receivables and has minimal capital expenditures, it poses minimal inflation risk. Shares are down 2% trading at $89.70.
You can sell the December 2011 $80 puts for nearly $4 today. That would give you an effective cost of $76, plus any commissions, if the shares are put on you. Otherwise you would collect a near-5% premium in less than 3 months.
The boring appeal of cash is more than made up for when the market gives wonderful opportunities to buy assets at attractive prices.
