Roundtable: Which Companies Can Buy It Like Buffett?

Why is it great to have a ton of cash sitting around?

If you ask Berkshire Hathaway's (NYSE: BRK-A  ) Warren Buffett, he might point out the great deals that he was able to score last year on Goldman Sachs (NYSE: GS  ) and General Electric (NYSE: GE  ) preferred stock. Or maybe he'd show off the massive $44 billion elephant that he bagged earlier this week.

In other words, a big cash hoard can be a great asset when it's in the hands of someone who knows how to put it to work. Buffett's obviously near the top of the list in this regard, but to track down other companies that stand to benefit from their cash stockpiles, I turned to the investing team at the Motley Fool Hidden Gems newsletter.

So fellas, who's got cash and knows how to use it?

Jeremy Myers, analyst
Apparently, there’s nothing like sitting on a big pile of cash in a buyer’s market. Just ask my new neighbors who bought the "short sale" down the street at a fire-sale price. Sure, you can color me bitter for having paid a higher price a few years back, but the smoking deal they got illustrates the power of cash in a down market.

And now that the darkest days are behind us -- or so I’ve been told -- I expect some of the market's big boys to be cautiously opportunistic as well. 

One company I’m watching in particular is Johnson & Johnson (NYSE: JNJ  ) , which is sitting on almost $12 billion in cash. The company can easily take advantage of the current health-care debate to grab some up-and-comers on the cheap. I’d love to see them pick up a fast-growing clinical lab like Bio-Reference Laboratories, a recent Hidden Gems pick. This move could boost J&J's diagnostics business while giving Bio-Reference the resources needed to develop its industry-leading cancer and genetic tests.

Seth Jayson, Motley Fool Hidden Gems co-advisor
Call me a heretic, but I don’t like a company with too much cash. Cash earns pitiful returns, so unless it's needed for working capital, expansion plans, or needs to be hoarded in order to withstand down-cycle cash burn, I think that cash belongs back in shareholder pockets via dividends. I suppose one could add share buybacks in here, but recent history at most firms proves that share buybacks are ill-timed public relations tools, or, worst of all, a means of soaking up excessive equity grants to employees and executives.

That said, one of my favorite growing, cash-rich companies is Hidden Gems portfolio candidate Guess? which uses its ample and growing pile of moola to the benefit of its shareholders.

Guess?'s $330 million cash hoard goes first to growing the business, expanding its new, lower-priced concept in North America while it pursues its lucrative, higher-end expansion plans globally. It also pays a nice, growing dividend. And to complete the trifecta, it has used some of its cash for some fairly savvy share repurchases.

The stock isn’t all that cheap right now, which is why we have yet to add it to our Hidden Gems real-money portfolio, but if you’re looking for a good small cap that's a great cash steward, Guess? certainly fits the bill.

Andy Cross, Motley Fool Hidden Gems co-advisor
If you ask me, I’m with Buffett, who said on CNBC when announcing his deal to buy Burlington Northern Santa Fe (NYSE: BNI  ) : “I like cash.”

Of course, few investors have earned the stellar returns investing piles of greenbacks like Buffett has. Still, I tend to favor cash-rich companies over cash-poor ones as long as I can count on management putting that cash to work for shareholders in good ways, and not blowing it on a dumb acquisition or fleet of airplanes (hello, GM?).

Netflix (Nasdaq: NFLX  ) has done a brilliant job investing its cash pile -- and healthy cash flows -- in a revolutionary streaming movie platform as well as an unparalleled DVD-by-mail distribution system. Both investments have paid off for shareholders so far.

In small-cap land, Neutral Tandem (Nasdaq: TNDM  ) , a data traffic router for telecom companies through its proprietary software, spends millions each year to build out its network. With $5 of cash per share, virtually no debt, and growing cash flows, investors, of which we count ourselves at Hidden Gems, should reap the rewards down the road.

Want to see the entire real-money portfolio that the Hidden Gems team has put together? Go ahead and take a free 30-day trial of Motley Fool Hidden Gems.

Berkshire Hathaway and Netflix are Motley Fool Stock Advisor recommendations. Berkshire Hathaway is a Motley Fool Inside Value pick. Johnson & Johnson is a Motley Fool Income Investor selection. Bio-Reference Laboratories, Guess?, and Neutral Tandem are Motley Fool Hidden Gems picks. The Fool owns shares of Berkshire Hathaway and Neutral Tandem. Try any of our Foolish newsletters today, free for 30 days

Fool contributor Matt Koppenheffer owns shares of Berkshire Hathaway and Johnson & Johnson, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool. The Fool's disclosure policy is readying its confetti for New Year's Eve.


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