Cash is not king. You simply can't reach any other conclusion when you look at the cash-rich companies in this marketplace.
USA Today led its Money Section with a stunning story this morning about how one-third of the cash on the balance sheets of American companies is held by just five companies. Five companies!
That's an incredible statistic, but what I think is even more amazing is that the stocks of those companies are doing quite poorly, down almost 3% on average.
Not only that, but the companies with the top 10 cash positions aren't on average beating the market, either.
Why is this?
First, generally speaking, this is a market that likes and values growth over value. The companies on this list for the most part are priced as if they are slower-growing value companies.
Second, there are specifics involving each case of these stocks and we need to address them and their performance specifically.
Third, while in each case much of the cash is held overseas and can't be repatriated without paying big federal taxes, that excuse for underperformance is a bit of a canard. If there are uses for capital to grow, believe me, that cash would be employed somehow.
Without further ado, here they are, with their cash positions and my explanation for their -- for the most part -- suboptimal performance.
First is Apple (AAPL), which is down 8% despite holding more $233 billion in cash. Apple, a part of the Action Alerts PLUS (my charitable trust) portfolio, used to be a great growth stock, but the market has decided that the growth is in the past. Apple sells at 11x earnings even as the average stock in the S&P 500 sells at 19x earnings. That's an incredible comedown for the largest company on earth, one that sells for $550 billion, which tells you how little people think of its cash position.
Let me say from the outset I think the market is valuing Apple incorrectly. It is viewing it as a handset company with nothing else really cooking. The market doesn't care at all that it has a service business that is growing by leaps and bounds and, in the next 18 months, will be a revenue stream that you will put a value on. That stream, which includes the money you pay to store your pictures and your music fee, if you pay for it, could take on a much more pronounced roll if the company were to use some of its cash hoard to boost it.
Right now, though, the large cash position seems almost like a reaffirmation of the judgment that this is a no-growth company -- a judgment that does not endear Apple to most of the big portfolio managers out there.
More important, there's a commonly held belief that the Apple iPhone 7 will be dead on arrival. The reason why the stock ran today has to do with press reports that the company is gearing up to make between 72 million and 79 million phones, the largest production run in two years. The company has always been very conservative when it comes to its build estimates, so I think, if the stories are true, this is still one more reason to own, not trade, Apple -- my posture for ages.
Still, the company has to take into account that all of its buybacks and dividends have not won over the critics who withhold their dollars and instead seek faster-growing opportunities. For the record, Apple did not miss the quarter -- the decline was caused by downbeat guidance and the fact that Apple does not have anything this quarter that can reignite the stock. I think that's where the opportunity is.
Next up is Microsoft (MSFT), with $105 billion in cash and a stock that has fallen 9.5%. This one is much more complicated than Apple. It is a company in transition, moving away from being personal computer based and instead offering cloud-based software. The change is a gigantic one and it had been happening quickly. However, in the last quarter that transition hit a wall, with both the cloud revenue and the regular old PC growing more slowly than Wall Street was looking for. That's been devastating and it has led to the decline.
The problem is that while the stock sells at the average price-to-earnings ratio of the S&P 500 and yields 2.87%, it is stuck at the $50 range because we have no idea if the cloud business has reaccelerated and we know the personal computer business has gotten worse. It's neither a value nor a growth stock until we find out about the transition and whether it has reaccelerated, and I think the only reason why it isn't lower is because of the outsize yield.
Alphabet (GOOGL), formerly Google, is next, with a stock down 7% for the year and with a $75 billion war chest. Alphabet, like Microsoft, missed the quarter, but I think that unlike Microsoft this company has more control of its own destiny, which is why my charitable trust sticks by it. I think Alphabet should put money to work to augment YouTube's stream of earnings. I think it should bid pre-emptively for the NFL's international rights. It would be a terrific windfall, and no one of the other media companies can possibly compete.
Cisco (CSCO) is next with $63 billion in cash, although, in a nice twist, it's up 3% for the year. However, that gain happened just recently as a consequence of an amazingly good quarter last week that showed a nice acceleration in revenue when Wall Street wasn't looking for one. Still, Cisco sells at 12x earnings with a 3.7% yield, which tells me that the market thinks this is a total no-growth, all-in value stock despite the excellent report last week.
Again, my trust owns this one because I think it severely undervalues what Cisco can do with that cash -- namely boost the dividend again, which would give it the highest yield of the major tech companies, as well as continue to purchase shorn unicorns to re-accelerate growth. It did that most effectively in February when it purchased Jasper Technologies for $1.4 billion to boost its Internet of Things exposure. It was a brilliant move, one of several already pulled off in the first year of CEO Chuck Robbins' tenure. I think that with Cisco's cash Robbins can pick off pretty much any of these private companies he wants because the public market is so hostile to initial public offerings.
Finally there is Oracle (ORCL), which has $50 billion in cash and, at $39, is up 7% for the year, although it is down from $44, where it was last year at this time. Oracle, like Microsoft, is trying to pull off a very difficult transition to be more of a cloud company and less of an on-premises information technology company. It currently sells at 18x earnings, so it is getting the benefit of the doubt that it can pull off the transition. However, I think the issue for Oracle is that so many other companies are challenging it in this space, especially Salesforce.com (CRM), which has much better growth and reported a huge upside surprise last week.
I think that Oracle is too cheap and there's plenty of room for more cloud players. However, because its growth lags that of others in the industry, it can't get any traction. I like its acquisitions that have worked well to boost growth, but I feel pretty lonely telling you that I think the stock is cheap because cheap is just not cutting it now.
Here's the bottom line: This market is making a judgment, a judgment that companies that have a lot of cash don't have a lot of growth and the cash is literally being held against them. Or, to put it another way, the cash is viewed as a sign that the companies have few opportunities to grow. I think that's nonsense. But then again, the market's judgment is severe, and we are, for lack of a better term, stuck with it until otherwise proven innocent.