Cash Is King

 | Oct 14, 2011 | 9:30 AM EDT
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"Cash is king" may be one of the most utilized phrases in the investment world, and you typically hear it most during times of great uncertainty and market upheaval.

While there is definitely something to be said for keeping some powder dry, especially for great opportunities like those in late 2008 and early 2009, the phrase has another connotation to me. As a deep-value investor, cash can also be king when it's on a company's books, and there's a lot of it relative to total current assets and debt.

Don't get me wrong, if cash is transient because a company is in the red, burning through its resources, and has few prospects of returning to profitability, it may not be meaningful. But if I can find a company that has loads of cash, is currently profitable, and can continue to be profitable moving forward, I might be inclined to dig deeper.

To that end, I've screened for names with the following attributes:

  • A minimum market cap of $100 million.
  • All industries but financials.
  • Profitable on a trailing 12-month basis.
  • Cash and short-term marketable securities less total debt represents more than a third of market capitalization.

More than 100 companies met the initial search criteria. Admittedly, there was a huge surprise at the top of the list in terms of market cap, that being General Motors (GM), a name that I've been very critical of. Indeed, GM ended the second quarter with $32.8 billion, or more than $20 per share, in cash and short-term securities, and $12 billion in short- and long-term debt. But here's why stock screens are just the beginning of the process: GM also has an additional $30.8 billion in pension and other postretirement liabilities that are not classified as debt. No thanks, I'll pass.

Not surprisingly, there are literally dozens of technology names that meet the criteria. Western Digital (WDC) is the largest in terms of market cap at $6.3 billion. The company ended its fiscal year in July with $3.49 billion, or nearly $15 per share, in cash, and just $294 million in debt, putting its net cash per share at $13.72, or nearly 48% of its current price. Trading at 9x trailing earnings, the consensus for 2012 puts the forward price-to-earnings ratio at 7.

MKS Instruments (MKSI) had $496 million or $9.48 per share in net cash at the end of its latest quarter, which represented 39% of current market cap. The chip-equipment maker trades for 8x trailing earnings, 11x 2012 consensus estimates, and yields 2.5%.

Electro Scientific Industries (ESIO), a member of my JIMS CRAB FEST portfolio for cheapskates, also made the cut. ESIO ended its first quarter with $177 million, or $6.20 in net cash and short-term securities, representing 46% of its current market cap. The chip-equipment maker trades at 28x trailing earnings and at 12x its 2013 consensus estimates.



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