Everyone wants to find a great stock that is trading at a bargain price. Some investors spend hours poring through data on hundreds of companies to find one standout stock to anchor a portfolio. But it might be far easier than you think to find your next great investment, especially if you start with the 30 stocks that make up the Dow Jones Industrial Average (DJINDICES:^DJI).

These companies generally exemplify the qualities we look for in great long-term investments: they're established market leaders with sustainable dividends and have put together decades of strong growth in all sorts of economic environments. Those qualities of size, strength, and stability also make many of these companies phenomenal at generating cash: 13 of the Dow's 30 components control nearly $700 billion in cash abroad, in addition to the billions they've got stashed right here at home. Cash comes in handy when a large-cap company is looking to buy its way to more business, but it can also make fairly valuing that company a little trickier; for Dow components General Electric (NYSE:GE), Cisco (NASDAQ:CSCO), and Microsoft (NASDAQ:MSFT) it can alter valuations so significantly that we're practically talking about a different company.

What does this mean?

When we talk about valuations, we're usually talking about the price-to-earnings ratio, or P/E. This is usually calculated by dividing a company's share price by its earnings per share. But this valuation encompasses all parts of a company -- the moving parts that are making (or losing) money, and the money itself, which is usually sitting somewhere waiting to be used.

Subtracting a company's cash per share from its P/E illustrates how valuable the market thinks that company's business is on its own, without the impact of those idle billions of dollars. General Electric, Cisco, and Microsoft are three America's largest corporate holders of cash abroad, but it's their size relative to the easily deployed part of their cash hoards that gives them the largest discount out of all 30 Dow stocks.

Let's look at what makes these three companies the stocks with the biggest "cash discount" of the Dow's components. At the end of this article, you'll find a table with the complete ranking of the 30 blue-chip stocks, from the largest to the smallest discount. Keep in mind that several Dow stocks operate in the cash-dependent financial industry, which is why they've been excluded from our official ranking here. 

Third-largest "cash discount" on the Dow: Microsoft
Bill Gates' baby has been a legendary cash machine for decades, as net margins have rarely dipped below 20% since its IPO nearly three decades ago. Microsoft has made a few splashy acquisitions over the years, but even its all-time high buyout price -- $8.5 billion for Skype in 2011 -- hasn't done much to dent the company's mountain of money. Microsoft is so good at making money that its cash discount has doubled from a relatively modest 13% at the start of 2010 to 26% today:

MSFT Cash and Short Term Investments (Quarterly) Chart

MSFT Cash and Short Term Investments (Quarterly) data by YCharts.

Second-largest "cash discount" on the Dow: Cisco
Cisco hasn't been quite as good as Microsoft at making money, as its available cash has only grown by 44% over the past five years, while Microsoft's hoard is nearly three times larger now than it was in late 2009. However, the market has evidently taken a dimmer view toward Cisco's business operations than it has toward Microsoft's, as the networking kingpin for several years has sported one of the largest discrepancies between baseline P/E and cash-less P/E of any Dow stock:

CSCO Cash and Short Term Investments (Quarterly) Chart

CSCO Cash and Short Term Investments (Quarterly) data by YCharts.

Today Cisco is tied for the second-cheapest nonfinancial Dow stock when cash is taken out of the equation, which is rather remarkable for a company that has more than doubled its earnings per share over the past decade.

The largest "cash discount" on the Dow: General Electric
GE has so much money in its coffers right now -- over $132 billion, at last count -- that it could buy 14 of its fellow Dow components outright. Not only is GE by far the largest holder of foreign cash of any U.S. company, it's also one of America's largest financial companies -- its GE Capital arm boasts over $500 billion in total assets thanks to hundreds of billions of dollars in loans made to businesses and consumers around the world. That gives GE an unparalleled position among its Dow peers, as its industrial operations are supported by so much cash from its financing segment that the company as a whole trades at a 50% lower valuation without that cash:

GE Cash and Short Term Investments (Quarterly) Chart

GE Cash and Short Term Investments (Quarterly) data by YCharts.

General Electric has been trying to slim down its financing arm since the Great Recession, but its cash on hand hasn't been hurt in the process, since GE now holds over $30 billion more in easily deployable resources than it did coming out of the crash. Investors who focus on GE's headline P/E figure are missing the bigger picture by a mile -- the company has never had such a large gap between its inclusive P/E and its cash-free P/E ratios, and this latter ratio hasn't been so consistently low in decades.


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Alex Planes owns shares of Intel. Add him on Google+ or follow him on Twitter @TMFBiggles for more insight into markets, history, and technology.

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