With all the emphasis on savings in these troubled economic times, it's surprising to learn 2011's worst performing stocks were the savers and the best gave their money back to investors through dividends and buybacks, reports Bloomberg.
This year saw record amounts of cash savings from large companies. Many analysts saw it as a wise decision given economic uncertainty. But it is likely the same mentality that spurred investors into buying strong dividend-paying companies. For some, nothing says security quite like dividend income.
According to Bloomberg, the 20 companies on the S&P 500 that increased cash and short-term investments the most lost an average of 15% in 2011. In contrast, "the 40 that repurchased the most stock or offered the biggest dividends climbed 5.7 percent."
Looked at another way, the 20 nonfinancial S&P 500 companies that spent the most to repurchase shares last year advanced 6.3%. Those that had the biggest dividend increases relative to their operating cash level rose 5.1%.
Chain reaction
Bulls are suggesting that this news of dividend stock outperformance might prompt the hoarders to unload their savings. If so, it could "help unlock almost $1 trillion of cash that chief executive officers have been hoarding for three years."
On the other hand, "bears say dividends and buybacks will be insufficient to keep the rally going as mandated budget cuts curb growth."
Looking forward
What works in the short term may not work in the long term. With Europe's sovereign debt crisis left unresolved, the fate of the American economy is still undecided.
"Another contraction may send investors back to companies that have piled up cash," according to Federated Investors' Lawrence Creatura. "The question investors have to ask themselves is, what will be the state of the global economy next year? That will define which companies you should own." (via Bloomberg)
Investing ideas
Investors are punishing companies that are holding on to too much cash. To help you explore this idea, we collected data on short trends and identified a list of cash-rich stocks that have seen a significant rise in short float.
All of the companies mentioned below have cash holdings that exceed more than four quarters of average operating expenses. In addition, all of these names have seen a sharp increase in shares shorted over the last month (i.e., an increase in bets that these companies are going to move lower).
This is significant, especially when you consider that short-sellers tend to be more sophisticated investors (due to the fact that they require strict credit approval to perform these trades). So, if these investors are turning bearish on a stock, it's worth paying close attention.
Do you agree with the bearish sentiment surrounding these cash-rich companies? Use this list as a starting point for your own analysis.
List sorted by the ratio of cash vs. average quarterly operating expenses. (Click here to access free, interactive tools to analyze these ideas.)
1. Solazyme (Nasdaq: SZYM ) : Engages in the production of renewable oil. Average quarterly operating expense over the last five quarters at $18.17M, vs. most recent cash and short-term investments at $250.58M, implies a Cash / Avg. Operating Expense ratio at 13.79. Shares shorted have increased from 2.04M to 2.44M over the last month, an increase which represents about 1.38% of the company's float of 29.03M shares.
2. Oncothyreon (Nasdaq: ONTY ) : Focuses on the development of therapeutic products for the treatment of cancer. Average quarterly operating expense over the last five quarters at $5.53M, vs. most recent cash and short-term investments at $59.62M, implies a Cash / Avg. Operating Expense ratio at 10.79. Shares shorted have increased from 9.54M to 10.29M over the last month, an increase which represents about 2.02% of the company's float of 37.06M shares.
3. Targacept (Nasdaq: TRGT ) : Engages in the design, discovery, and development of novel Neuronal Nicotinic Receptors (NNR) Therapeutics for the treatment of diseases and disorders of the central nervous system. Average quarterly operating expense over the last five quarters at $24.5M, vs. most recent cash and short-term investments at $213.48M, implies a Cash / Avg. Operating Expense ratio at 8.71. Shares shorted have increased from 3.68M to 4.25M over the last month, an increase which represents about 2.46% of the company's float of 23.13M shares.
4. Mitek Systems (Nasdaq: MITK ) : Develops, sells, and services software solutions related to mobile imaging applications and intelligent recognition software in the United Stats and Internationally. Average quarterly operating expense over the last five quarters at $2.27M, vs. most recent cash and short-term investments at $15.84M, implies a Cash / Avg. Operating Expense ratio at 6.97. Shares shorted have increased from 2.10M to 2.88M over the last month, an increase which represents about 4.92% of the company's float of 15.84M shares.
5. Air Lease (NYSE: AL ) : Engages in the purchase and leasing of aircraft. Average quarterly operating expense over the last five quarters at $49.9M, vs. most recent cash and short-term investments at $279.65M, implies a Cash / Avg. Operating Expense ratio at 5.6. Shares shorted have increased from 5.13M to 6.25M over the last month, an increase which represents about 1.34% of the company's float of 83.61M shares.
6. BioSpecifics Technologies (Nasdaq: BSTC ) : Involves in the development of an injectable collagenase for various indications. Average quarterly operating expense over the last five quarters at $1.57M, vs. most recent cash and short-term investments at $8.8M, implies a Cash / Avg. Operating Expense ratio at 5.6. Shares shorted have increased from 203.84K to 254.42K over the last month, an increase which represents about 1.24% of the company's float of 4.08M shares.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
List compiled by Eben Esterhuizen, CFA. Kapitall's Rebecca Lipman and Eben Esterhuizen do not own any of the shares mentioned above.
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