Cash is king, and these companies have a lot of it.
With banks slow to lend, and even then with extremely tight requirements, credit remains hard to get, particularly for small firms. Our economy faces many headwinds today: Unemployment is expected to remain elevated for an extended period of time, problems continue in housing, and although households are reducing debt, it will take some time to pay off debt loads. While businesses have been smart to hoard cash and are starting to invest it -- whether through raising dividends, share buybacks or strategic acquisitions -- there's a good chance the economy could moderate from current levels.
With these forces at play, liquidity has become more important than ever.
Investing in companies that have lots of cash, like CNOOC and Apple, is extremely prudent in this environment, as companies need strong balance sheets to manage through uncertain economic times and take advantage of opportunities.
There are a number of metrics you can use to evaluate a company's liquidity. One of the easiest is the current ratio (current assets divided by current liabilities), which measures the company's ability to pay off its short-term obligations. A current ratio of 1 means the company has just enough short-term assets to pay off its short-term liabilities; higher ratios mean that some current assets would be left over.
Another way to view a company's cash position is to look at cash per share. This shouldn't be looked at in isolation, though, as it's a dynamic number, and the company could be burning through its cash instead of generating more. Look for trends in cash flow alongside it. For instance, is cash flow from operations accelerating over a multiyear time period? The answer should be "yes."
OK, so now you have a couple of tools to assess a company's liquidity. How do you go about finding the good companies? One surefire way is to use The Motley Fool's CAPS screener, an excellent tool to help you identify cash-rich companies.
To find some of the best liquid companies, I searched for those that have these four traits:
- A CAPS top rating of five stars.
- A current ratio of 2 or greater.
- Cash per share of $2 or greater.
- Market cap of $100 million or greater.
Here's what my screen came up with:
|
Company
|
Cash Per Share
|
Market Cap
|
Current Ratio
|
|
Agrium (NYSE: AGU )
|
$5.93
|
$9.9 billion
|
2.0
|
|
American Physicians Service
|
$2.67
|
$160.7 million
|
7.1
|
|
Forrester Research (Nasdaq: FORR )
|
$4.36
|
$722.3 million
|
2.3
|
|
Hasbro (NYSE: HAS )
|
$4.66
|
$5.4 billion
|
2.5
|
|
Infosys Technologies (Nasdaq: INFY )
|
$3.46
|
$35.4 billion
|
5.9
|
|
L.B. Foster (Nasdaq: FSTR )
|
$12.28
|
$301.4 million
|
3.6
|
|
Morningstar (Nasdaq: MORN )
|
$2.67
|
$2.3 billion
|
2.1
|
|
Quality Systems (Nasdaq: QSII )
|
$2.76
|
$1.8 billion
|
2.3
|
Source: Motley Fool CAPS, as of April 30, 2010.
*Does not include short-term investments.
This CAPS screen turned up some great companies, but a company's liquidity should be only one part of your analysis -- you also have to ask yourself whether these companies will remain cash-rich.
For example, let's take a closer look at CNOOC, China's oil and gas exploration and production goliath. The company made a fortune as oil prices rocketed to previously unforeseen levels, fueled by the idea that demand would only climb as emerging markets built out their infrastructure. CNOOC piled up the cash as the good times rolled. Then came a global slowdown, and oil prices dropped like a rock. Since then, prices have come back, lifting profits as well. And with China in the midst of industrialization, oil and energy will play a significant role in that in the long term.
The same argument for sustained liquidity is true for Apple. Consumers remain cautious, and Apple is a consumer-facing company. However, the maker of iPods and iPhones showed remarkable strength in the midst of the downturn, and recently reported its best non-holiday quarter on record. If this technological whiz kid can continue churning out popular and innovative products, with the iPad being the next big test, cash should continue piling into its coffers.
When screening for stocks with strong cash positions, always remember the words of Jerry Maguire client Rod Tidwell: "Show me the money!"
To learn more about these companies or other investment ideas, check out what our 160,000 CAPS community members have to say. Your opinions are more than welcome!
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