The investment world has one variable that reigns over all others. Treasured by some, it is given a glancing appreciation by many. Few give it a star rating.
That variable is cash. The phrase "cash is king" neatly summarizes the value that savvy investors place on this asset. Cash is valued because it is real, not easy to manipulate, highly useful, reduces investment risk and provides a great cushion to lessen the shocks when something unexpected -- such as a sharp downturn in sales -- happens, and it's a great tool to take advantage of opportunities, such as buying products and companies.
In January 2012, I wrote about cash and recommended three companies with at least 40% of their market caps in cash. They also earned high grades from at least one of my guru strategies, computerized strategies I created that mirror the investing ways of the best strategists on Wall Street.
One company I wrote about was Forest Laboratories (FRX). At the time, it was trading at $30.65. Last month, it was trading just below $70, a gain of more than 125%. Then Actavis (ACT) offered to buy it and it now trades a shade below $100, more than triple its price when I recommended it. Cree (CREE), another company that I wrote about, saw its stock go up in this period by 175%, to $60.52 from $22. Also highlighted in that column was Applied Materials (AMAT). Its stock is up to $19.16 from $10.20, an 88% jump. During the same period, the S&P 500 has enjoyed a 47% gain -- impressive, but not nearly as good as these cash-rich stocks.
With the market up so sharply in the past year, now is the time to look at stocks with built-in cushions, namely those with 40% or more of their market caps in cash. None of the three stocks I wrote about two years ago still have 40% of their market caps in cash and guru-strategy approval. But three others with sufficient cash hoards and guru approval deserve your attention now.
First is tech powerhouse Cisco Systems (CSCO), whose market cap is more than $112 billion with cash holdings of nearly $51 billion, about 46% of its market cap. A strategy I base on the writings of James P. O'Shaughnessy selects Cisco for its large market cap, healthy cash flow per share of $2.04, 5.4 billion shares outstanding and robust $47.8 billion in sales. Of the 50 companies that pass these four hurdles, Cisco has among the highest dividend yields, at 3.5%.
NetApp (NTAP) is another tech company sitting on plenty of cash. A provider of storage systems and data management solutions, it has close to $7 billion in cash and a market cap of $13.2 billion, making its cash holding worth about 53% of its market cap. I use a strategy created using the writings of Peter Lynch, and this strategy likes NetApp. Lynch stressed the P/E/G ratio, which is price-to-earnings relative to growth, and is a way to know how much the investor is paying for growth. A P/E/G of up to 1.0 is acceptable, and NetApp's P/E/G is perfectly fine at 0.86.
Bridgepoint Education (BPI), which provides secondary education under such names as Ashford University and University of the Rockies, has cash of about $515 million , as of Sept. 30, 2013, and a market cap of $1.1 billion, making its cash worth 47% of its market cap. Like NetApp, Bridgepoint is a Lynch-strategy favorite. Its P/E/G ratio is a very desirable 0.58.
These three companies have plenty of cash and stocks that trade at a reasonable price. Buy their stocks now, and put some cash in your portfolio later.