"I don't look to jump over seven-foot bars: I look around for one-foot bars that I can step over."
-- Warren Buffett
If you're in the market for those one-foot bars Buffett loves, I've got a good starting point: companies whose net amounts of cash on hand represent a significant portion of their share prices. On a few rare occasions, you're being handed the actual business operations for free -- or at least, close to it.
Using the wisdom of our 130,000-investor-strong Motley Fool CAPS community, I went hunting for companies fitting this "scraped-off-the-pavement" criteria. Specifically, I looked for:
- Estimates of profitability in 2009.
- No long-term debt.
- A high level of total cash in relation to current share price.
Pretty straightforward. Among others, I came across these five:
|
Company
|
Market Cap
|
Recent Price
|
Total Cash per Share
|
2009 EPS Estimates
|
CAPS Rating
(5 stars max.)
|
|
American Eagle (NYSE: AEO )
|
$2.8 billion
|
$13.59
|
$2.34
|
$0.76
|
***
|
|
eBay (Nasdaq: EBAY )
|
$21.9 billion
|
$17.15
|
$2.52
|
$1.47
|
***
|
|
iRobot (Nasdaq: IRBT )
|
$303.2 million
|
$11.99
|
$2.19
|
$0.03
|
***
|
|
Morningstar (Nasdaq: MORN )
|
$2.0 billion
|
$40.32
|
$6.00
|
$1.81
|
*****
|
|
Volcom (Nasdaq: VLCM )
|
$302.1 million
|
$12.74
|
$3.49
|
$0.77
|
****
|
Data from Motley Fool CAPS and Yahoo! Finance, as of May 22, 2009.
A case of mistaken identity
The financial-services industry is currently about as admired as a cold sore. Between AIG, Madoff, bailouts, bonuses, and overall economic obliteration, the public tends to sneer at anything and everything attached to finance as criminally evil. And much of it is.
Nonetheless, this unwarranted cynicism's no better than the blind optimism that created a bubble in the first place. It lumps together good companies with bad ones -- creating opportunities for patient and diligent investors.
While it's already well off its lows, Morningstar remains one such company. The investment-research giant provides a high-quality service that, by and large, has kept its reputation intact. CAPS member PsychoDr recently wrote how Morningstar has often been incorrectly associated with rating agencies such as Moody's (NYSE: MCO ) :
People will always pay for objective advice. Though profits have dropped, along with everyone else, these shares are oversold. People see them as a rating agency stock, though they are not at all involved in this area. Good strong company, have a solid reputation, and people will continue to use their advice, especially once the turmoil has settled. I just wish they paid a dividend.
This first sentence in this post is key: People will always pay for good, high-quality, objective advice, which gives Morningstar a long-term, stable, profitable moat. That moat has likely grown wider over the past two years, as financial advisors and big bank research shops shelled out advice that was -- as Jon Stewart refers to Jim Cramer -- "like a dartboard that talks." As accounts of Wall Street incompetence fill the headlines, competition for Morningstar is shrinking by the day.
On the valuation side, Morningstar's biggest attraction is a balance sheet laden with $286 million of cash and short-term investments, and not a penny of debt. Such conservatism should be welcomed, especially after financial firms such as Citigroup (NYSE: C ) got clobbered by their own runaway balance sheets.
The one drawback here is that shares aren't exactly what any sober investor should consider "cheap," at about 21 times forward earnings. Sure, that's standard for high-quality names like Morningstar, and the cash-rich balance sheet dilutes some of that multiple, but be aware that these shares hardly qualify as a bargain. While it's not overvalued, the stock at these levels makes my inner value investor a little queasy. Nonetheless, I'd definitely recommend keeping a watchful eye on this company.
Your turn to chime in
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