How to Make Money With Cash-Rich Companies

 | Oct 10, 2016 | 11:00 AM EDT
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I do a lot of my best thinking while out walking the dog every day. One of the real benefits of living in Florida is that we can take long walks in good weather nearly every day of the year, so we take several long walks a day.

This weekend, I was dwelling on ways to uncover stocks in a rich market, and I pondered cash-rich companies. Specifically, I considered looking for stocks that had a lot of cash on hand and were also producing positive cash flows. Companies in that strong a financial position should be able to find ways to use the cash to expand the business, make smart acquisitions or buy back shares if they can at a bargain price to help move the stock higher.

I sat down and ran a screen looking for cash-rich companies that also had positive cash flows. I decided, as I usually do, to be super cheap and only consider those that trade for less than 3x net cash on the balance sheet. As has been the case with all my screens this year, I didn't find a lot of stocks, but I did find a few interesting companies that appear to have solid long-term return potential.

Park Electrochemical (PKE) is not in an exciting business, but it is an industry that should see decent demand for its products for a very long time. The company makes and sells high-technology digital and radio frequency microwave printed circuit material products, primarily for the telecommunications, internet infrastructure and high-end computing markets. It also has a division that makes composite parts used in aircraft structure.

The company recently fell short of Wall Street expectations and the stock has been hammered in the past week, losing 13% of its value. A peek at the balance sheet released last Friday shows $103 million of cash and $136 million of marketable securities and just $130 million of liabilities. That leaves us with a net cash value of $109 million, and the total market cap of the company is just $298 million.

I also noted that it has been free cash flow positive. If you back the $5.60 of net cash per share out the company is selling for about 11.75x earnings, a bargain price given its growth prospects over the next few years. The EV/Ebit ratio is under 7x, so the stock is a bargain on that measure of value as well.

Aware (AWRE) is in a slightly more exciting business as it sells biometrics software products, services, and solutions. This software enables fingerprint, face, and iris recognition and authentication solutions. This is going to be a huge industry. I know from talking to a lot of bankers on a regular basis that this will be very much in demand for cybersecurity purposes in the near future.

Defense agencies and law enforcement will also be using biometric data to a much larger degree. It is an industry on the near edge of a massive explosion in demand. Wall Street doesn't love the company, because sales and profits can be very lumpy as it's a big order business with a big quarter to quarter swings.

The balance sheet shows $53 million in cash and no debt. The total market cap is just $121 million, so Aware easily meets my test for a cash rich company. It has been free cash flow positive for the past three years and is well on its way to making it four in a row in 2016. If you back the cash out, you are paying less than 11x earnings, which is pretty cheap for a company that has been growing earnings by more than 40% a year over the past five years.

The company has been using some of the cash to buy back stock. In April it announced a $10-million-dollar stock buyback and in the second quarter it repurchased 81,980 shares of stock for a total of $349,000. Officers and directors own a little over 18% of the company, so they have some skin in the game, which is always a plus. It may be a lumpy bumpy ride, but I think this stock has the potential for large long-term returns.

Looking for cash-rich companies that are producing, not using cash can be one way to find potential bargains in a pricey market.

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