Cash is king, and these companies have a lot of it.
The credit markets remain tight, and unemployment is expected to remain elevated for an extended period of time. Unsurprisingly, consumers continue to clench their purse strings tightly. Businesses have also been cautious to invest. With these forces at play, liquidity has become more important than ever.
Investing in companies that have a lot of cash -- like Apple and CNOOC -- is extremely prudent in this environment, because companies need strong balance sheets to manage downturns 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 would 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, because it's a dynamic number, and the company could be burning through the cash instead of generating more. To help with that, also look for trends in cash flow. For instance, is cash flow from operations accelerating over a multiyear time period? The answer should be "yes."
OK, so you now have a couple of tools to assess a company's liquidity. How do you go about finding the good companies? The Motley Fool's new CAPS screener is a handy-dandy tool to help you identify cash-rich companies.
To find some of the best liquid companies, I searched for companies that have:
- CAPS' top rating of five stars.
- A current ratio of 2 or greater.
- Cash per share of $2 or greater.
- Market caps of $100 million or greater.
Here’s what my screen popped out:
|
Company
|
Market Cap
|
Current Ratio
|
Net Cash Per Share*
|
|
Adobe Systems (Nasdaq: ADBE )
|
$19.1 billion
|
4.9
|
$2.16
|
|
AZZ (NYSE: AZZ )
|
$421 million
|
3.7
|
$5.85
|
|
China Natural Gas (Nasdaq: CHNG )
|
$202 million
|
10.9
|
$2.64
|
|
II-VI (Nasdaq: IIVI )
|
$869 million
|
8.3
|
$3.57
|
|
L.B. Foster (Nasdaq: FSTR )
|
$300 million
|
4.2
|
$12.00
|
|
Morningstar (Nasdaq: MORN )
|
$2.3 billion
|
2.4
|
$3.90
|
|
PetMed Express (Nasdaq: PETS )
|
$379 million
|
9.6
|
$2.46
|
Source: Motley Fool CAPS. *Does not include short-term investments.
The CAPS screen turned out some great companies, but a company's liquidity is only part of your analysis. You also have to ask yourself whether these companies will remain cash-rich.
For example, let's look at China's oil and gas exploration and production goliath, CNOOC (mentioned above). The company made a fortune as oil prices rocketed to unforeseen levels, fueled by the idea that demand was only going to climb as emerging markets build out their infrastructure. Then came a global slowdown, and oil prices dropped like a rock. Since then, prices have begun to come back, illustrating that we’re not stuck in that dreary position forever. China's in the midst of industrialization, and oil and energy will play a large part in that over the long run.
The same argument for sustained liquidity is true with Apple. Customers are suffering now, and Apple is a consumer-facing company. However, the maker of iPods and iPhones has shown remarkable strength in the midst of this downturn. If this technological whiz kid can continue churning out popular and innovative products, 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 145,000 CAPS community members have to say. Your opinions are more than welcome!
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