Saturday, March 21, 2009

Volume 3, Issue #21

In today's TopStockAnalysts Digest, Nathan slaughter, editor of Half-Priced Stocks, will uncover companies that are so cash loaded, that investors are essentially given everything on the balance sheet for free. (Full Story Below).   

Also in Today's Issue...

Do you Accept Cash
Virtually every business has some cash in the bank; they wouldn't be around too long otherwise. But they also have debt that must be repaid, and most companies owe far more than they own. In other words, they have a negative net cash position.

Take General Motors (NYSE: GM), for instance. The automaker's cash stockpile of $16 billion looks pretty good, until you realize that it has racked up more than $45 billion in debt.

On the flip side, there's a company like Google (Nasdaq: GOOG) that has nearly $16 billion in cash and zero debt. It would take $96 billion to buy every outstanding share of the online search giant. But doing so would put all those greenbacks in your hands, which would effectively lower the real purchase price (or Enterprise Value) to just $80 billion.

Of course, you probably won't be scooping up entire companies. But being a part-owner entitles you to a pro-rata share of the wealth. And it never hurts to approach an investment from the viewpoint of a private equity group eyeing a potential acquisition -- it's worked pretty well for guys like Warren Buffett and Mario Gabelli.

Keying on cash is also what made Ben Graham one of the most celebrated value investors of all time. Graham's situation wasn't that different than what we are facing today. After nearly being wiped out by the spectacular market losses of the Great Depression, he was determined to find a better investment approach -- one centered on the idea of capital preservation.

Graham figured (rightly so) that if you pay less for a company than what can be liquidated and returned to shareholders, then you really can't go wrong. To do that, he prized cold-hard cash above all else, valued accounts receivable at $0.75 on the dollar (because some won't be collected) and inventory at just half its face value (because of fire-sale, close-out markdowns).

If you take what's left and subtract out all liabilities, then you are left with the net net working capital (NNWC). This is an ultra-conservative value of what a company might be worth if it was forced to shut down and sell everything it owned.

If you stick to companies trading near or below this total and worse comes to worse (as it has all too often lately), then at least you know you're paying less than what you'll get back after liquidation. Compare that to valuing stocks according to pie-in-the-sky profit forecasts, and it's easy to see how this safety-net approach can keep you out of trouble.

But it can do more than that -- finding companies whose vaults are overflowing can also help stuff some cash in your own piggy bank.

It Takes Money to Make Money
Occasionally, you'll run across someone who sees cash as more of a burden than an opportunity. Aggressive investors sometimes make the argument that money sitting idle in the bank simply means a company has exhausted its growth opportunities. However, this type of thinking is flawed and short-sighted.

At the very least, a stockpile of excess cash tells us that a company literally has more money left over than it knows what to do with -- which is not a bad problem to have.

In any case, it never hurts to have a comfortable rainy day fund to fall back on. And in today's torrential downpour, deep-pocketed companies have options that cash-strapped firms don't. They have the luxury of repurchasing more stock, paying greater dividends, or investing in promising opportunities that might unfold.

Just look at Warren Buffett. For years he stonewalled pressure to whittle away Berkshire Hathaway's (NYSE: BRK-A) bulging mountain of cash and patiently waited for just the right time to act. And with companies everywhere gasping for capital, he has been putting that cash to great use -- lending money to firms in need and extracting highly favorable terms that could mean billions for Berkshire shareholders.

As value manager Whitney Tilson points out, companies with large bankrolls aren't just going to survive this downturn, they can use their "financial firepower" to acquire weaker competitors and become even stronger.

While companies with undisciplined balance sheets can only sit and wait, those with ample war chests will go on the hunt -- many pharmaceutical firms, for example, are well-armed to take over promising biotechs or lock up lucrative drug development deals.

Shopping has never been better, and companies that have saved their pennies could be sitting on a gold mine if the right deal comes along. And if you think this can't have an immediate impact, think again. Just last week, Boyd Gaming (NYSE: BYD) shares vaulted +40% after the company announced plans to acquire rival Station Casinos.

Even if a company likes the hand it has been dealt and wants to stand pat, it's still reassuring to know they won't have to worry about tapping the frozen capital markets for funding. Entire sectors of the market have been hammered over a perceived lack of liquidity, but cash-rich companies can sleep tight -- they can't spend the money they already have.

The point is, this is a ripe environment for cash to reproduce and create more cash.

A Less Crowded Playing Field
In ordinary market conditions, it's nearly impossible to find attractive companies whose net cash exceeds market cap. That money would act as a floor, and the negative enterprise value could entice arbitrageurs to step in and collect a quick profit.

But in this market, the usual rules don't apply. Leveraged buyouts and other mergers and aquisition activity has dried up because of the lack of financing -- leaving deals for the rest of us that would usually be off the table by now.

One caveat: be careful to avoid money-losing firms whose cash is quickly dwindling. After all, what good is a $3 million bank account if the company is burning through $1 million per quarter. But if you choose carefully, the rewards can be tremendous.

According to Bloomberg, there were 275 companies trading for less than cash during the last bear market in 2002. And the following year those stocks soared 115% -- triple the return of the overall market.

The sharply undervalued companies in the table below could follow a similar path. They have deep cash reservoirs and other attractive qualities and should deliver outsized gains once the market comes to its senses.

The companies in this list are not actual buy recommendations -- although their cash positions alone make them great candidates for further research.

Good Investing!

Nathan Slaughter
Editor
Half-Priced Stocks

P.S. If you'd like to learn which cash cow Nathan believes has the potential to appreciate by over +250%, I invite you to join me at Half-Priced Stocks. 

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