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These Companies are Sitting on Billions of Dollars

January 19, 2011 | About:
Street Authority

Street Authority

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The S&P 500 pushed back above 1,100 in September 2010, past the 1,200 mark in early December and is already on the cusp of 1,300. With that kind of upward move, it's reasonable to feel cautious. You want to participate in this impressive rally, but don't want to give up big gains if the market shifts direction. That's why defensive stocks make real sense right now. [My colleague Tom Hutchinson agrees]

I'm not talking about low beta stocks that tend to ignore market gyrations. I'm talking about stocks with plenty of cash. Cash serves as a backstop in tough times and a competitive weapon in good times. And no sector is sitting on mountains of cash like the tech sector.

Surprisingly, even after this sharp upward move in the markers, a number of tech stocks hold enough cash to account for a decent chunk of the entire stock market value. The table below highlights nine tech stocks that sport at least 25% in their market value in net cash.

01-18-11-sad-sterman.jpg

Will these companies go on a buying spree (either of other companies or their own stock)? Or might they hang onto that cash to weather any upcoming pullback in the economy? Either way, it's nice to have such options. Let's look at some of the most intriguing cash-rich plays among these tech stocks.

A brief recap...

I've covered a few of these names in the recent past. I recently noted that Earthlink (ELNK) has developed a misunderstood, but potentially lucrative business model as it moves away from being a dial-up Internet access provider.

I discussed Dell's (DELL) prodigious cash flow that complements its hefty cash hoard back in November. Dell is still a company in search of growth (perhaps enabled by a recent acquisition spree), but its balance sheet remains stunningly strong. Cash could account for more than 40% of its market value by the end of 2011.

Two more candidates

It would be awfully tempting to get behind Comtech Telecommunications (CMTL), as this provider of satellite and microwave communications systems remains nicely profitable even as it enters a cyclical slump which will likely lead to a 20% drop in sales this year. But it's unwise to spend time on stocks that lack any near-term catalysts, and aside from a current stock buyback, there are few timely virtues. Nevertheless, keep an eye on the M&A space. Some investors suspect that Comtech will be a buyer or a seller in 2011.

Verisgn (VRSN) highlights a tangible benefit that a bulletproof balance sheet can bring. In late December, it paid out a $3 a share one-time dividend. And it could afford to do so several times more in coming years if it so choose.

An intriguing small business play

My favorite name in this table is Intermec (IN), which is a leading player in the field of barcode scanning, right behind Motorola Mobility's (MMI) Symbol division.

A wide range of retailers, along with companies operating massive warehouse/logistics operations, use these scanners to track goods as they work though the supply chain. Thanks to the economic slowdown, many customers decided to hold off on scanning system upgrades, leading Intermec to post a 25% drop in sales in 2009. Sales were flattish in 2010, but a recently rising backlog along with feedback from customers implies that sales could rebound 10% in 2011.

This is known as a "late-cycle play," as Intermec's customers tend to invest more heavily in capital spending when an economic rebound is fully underway. A bullish sign: Intermec just announced that 2010 fourth-quarter sales came in ahead of prior forecasts. The company also announced an acquisition of Vocollect Inc., which will enable workers to use voice commands to track goods as they move through the warehouse. This should enable a truly "hands-free" environment, yielding productivity gains in the warehouse.

Intermec also holds an interesting wildcard that may be overlooked by many investors: The company owns a wide range of patents in the field of radio frequency identification (RFID), which allows for more advanced forms of asset tracking. The technology has not supplanted barcodes as many had expected just a few years ago, but it is starting to make serious inroads. Intermec stands to collect hefty royalty streams if RFID becomes even more widely adopted.

Back when RFID was in the spotlight in 2006 as a key emerging technology, Intermec's shares hit $35. These days, shares trade for a third of that value. A rebounding core business, an appealing new acquisition and a potential RFID kicker could be what Intermec finally needs to break out of its current two-year trading range. It's hard to pin specific upside for these shares, although a rebounding economy could set the stage for a sustained double-digit rebound in sales and even more robust profit growth.

Action to Take --> You can sleep better at night with these cash-rich stocks. And although Intermec is my favorite on this list, any one of these strong balance sheet stocks should provide ample downside protection even if the market swoons.

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-- David Sterman

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

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Street Authority
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Comments

kfh227
Kfh227 premium member - 3 years ago


I saw an interesting chart this morning that dispayed the percent of family money invested in equities as a percent. We are at historical lows. With a recovering economy, this might be the start of a bull market.
AlbertaSunwapta
AlbertaSunwapta - 3 years ago
Good article - I'll start looking at these companies much more closely!

I regards to your initial remarks about caution though, based on my recent experience, I don't know if I'd sleep much better holding cash rich companies vs just holding the cash myself - particularly in an environment of heightened inflationary risk. Today, I'd say that as a pre-requisite to my sleeping well, cash-rich companies need to have a proven track record of intelligent capital allocation and opportunistic deployment of past cash reserves.

Take my experience in 2008/09. In 2008 I'd gone to over 80% cash and I sought out and bought mostly cash rich companies that I thought would take advantage of a market collapse. While my all equity-only portfolios fell far less than the market as a whole, I was very disappointed with the corporate reaction to the once-in-a-generation market offerings. The general reaction was inaction as in a crisis many corporate managers behave just like everyone else. In fact, they have to - their shareholders demand it.

I'd guess that in another market pull back, many cash rich companies will again just sit on their cash as they did in 2009. Moreover the market does not seem to give much credit for holding large cash reserves. Apple was a good example. The market pummelled Apple shares despite its huge cash reserves. However, I did double up on Apple at around $90/sh using some of the cash in my own account.

Moreover, keeping cash in one's own account appears to the be only way to go. Take Berkshire Hathaway in March 2009. Even with Buffett's record of intelligent capital allocation, plus his cash holdings, the market still found reason to drive down the shares. Again, I as able to redeploy cash into a couple more BRK shares a few days off it's low.

As Buffett said when he went to cash in the early '70s... 'If he'd stayed in the market he'd have had mediocre returns'. I still think that's one of the most important things Buffett has ever said.

AlbertaSunwapta
AlbertaSunwapta - 3 years ago
One final comment. I feel that companies that build up cash are much like today's buyers and holders of gold. Even when gold peaks, many of the holders will continue to cling onto it well past its peak simply because their belief in holding it has been confirmed. Once justified, they can't let go of it because of their self-reinforcing mindset, "things can and will only get worse". They are not manic-depressive - just depressive.

PS. I feel that by their nature, 'value' investors if anything tend to be eternally optimistic - even when its unjustified.
AlbertaSunwapta
AlbertaSunwapta - 3 years ago
Oh, and regarding RFID patents - let's hope they are working on some new ones :-)

Electronic Pickpocket

http://www.youtube.com/watch?v=GJbtMclbatU


Reminds one of Apple's iPhone 4 problem. Maybe the card companies will have to give these shields out for free?

Sooo... what's the potential liability impact of something like this to the RFID companies? How about any hit to Visa, Amex, Mastercard?

And buy aluminum! :-)

http://www.youtube.com/watch?v=T0Uc_s3XzSs

(Some more trivia - I see on YouTube that there's a "How to" video with nearly 490,000 views to only 180,000 views of the "electronic Pickpocket's warning message.)

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