In an economic downturn, companies with lots of cash benefit in several ways. Not only are they safer than companies with lots of debt, but they can capitalize on the weakness of others, making cheap acquisitions or buying back their own stock at a discount.
Not only that, but cash-rich stocks also have an added benefit at the current moment. Many companies park their corporate cash into short-term Treasury bonds, which now have larger yields than they've had in years. In fact, the one-year Treasury Bond now yields roughly 4.3%, up from near-zero just a year ago.
These three stocks all have lots of options today, making them good pickups in this bear market.
1. Alphabet
Google parent Alphabet (GOOG 0.56%) (GOOGL 0.69%) has gotten some heat over the years for retaining lots of cash on its balance sheet, but it's looking like a nice advantage now. At the end of the second quarter, the company had $125 billion in cash and low-risk marketable securities, such as Treasuries, corporate debt, money market funds, and mortgage-backed securities.
Think about it: If Alphabet put all $125 billion in one-year Treasuries, it can make an extra $5.375 billion in interest income alone. That would increase Alphabet's $78.7 billion in 2021 operating income by 6.8%, all by itself.
Alphabet also has a $70 billion share repurchase program underway, which it announced back in April. Alphabet had generally been a consistent buyer of its own stock over the past few years, and this is its biggest buyback program yet. At Alphabet's current market cap of $1.28 trillion, that $70 billion could retire 5.5% of Alphabet's stock.
And of course, Alphabet has a long history of successful acquisitions, such as YouTube and Android. Its most recent move was the acquisition of Mandiant, a leader in cybersecurity, which just closed in September.
Alphabet is down with the market on fears ad spending will slow or decline in a recession. While that may be true, the company has several advantages. Digital advertising is still a long-term growth industry once we get to the other side of this cycle, Google still has a virtual monopoly on Search worldwide, and Search ads are just about the last thing an advertiser will cut due to their efficiency.
2. Berkshire Hathaway
Warren Buffett's conglomerate Berkshire Hathaway (BRK.A 0.36%) (BRK.B 0.21%) has also retained a large cash pile, as Buffett and his team hadn't found much to invest in during the go-go bull market of 2020-2021. However, Buffett has been aggressively buying oil stocks Chevron and Occidental Petroleum in 2022, which has brought down Berkshire's cash pile.
Yet the Buffett-led conglomerate still has over $100 billion in cash and short-term marketable securities in its "insurance and other" divisions. While many criticized Buffett for not buying more stocks in the 2020 COVID market crash, it's quite possible this downturn could lead him to put more cash to work.
Of course, Buffett seems to only have eyes for Occidental Petroleum these days, as Berkshire exceeded 20% ownership in the company this summer, and some believe Berkshire will move to acquire the entire company in time. That could require another $50 billion or so at Occidental's current market levels.
Berkshire's portfolio of businesses does have some cyclicity in them, especially its railroad and manufacturing businesses; however, the utilities business is a rising star, which is a growth business that should be shielded from the economic downturn. Moreover, the insurance underwriting business has a remarkable history of underwriting profits most years -- a rarity for insurance companies and testament to Berkshire's unique insurance franchises.
The insurance float also brings a consistent stream of new money to Berkshire for Buffett to reinvest, along with the now-ample dividends Berkshire receives from its giant equity portfolio. It's another cash cow stock one can safely hold through this downturn.
3. Marqeta
Though not as "safe" as the previous two large-cap stocks, fintech stock Marqeta (MQ 1.89%) is a smaller cash-cow company, albeit with some risks. Marqeta may not have a lot of cash in absolute terms, but it's huge in relation to its market cap, which should help mitigate risks in this young company. But perhaps most exciting, Marqeta could have a very big growth runway ahead of it.
It was a bit lucky that Marqeta went public in the summer of 2021, when technology companies were getting very high valuations. Its well-timed IPO has left Marqeta with about $1.67 billion in cash on its balance sheet. Since the stock has declined mightily with other growth stocks this year, its cash now makes up a stunning 43% of the company's market cap.
Marqeta is still generating losses, but much of that is due to stock-based compensation. Through the first six months of the year, its cash burn was only about $25 million. That will hardly make a dent in Marqeta's cash pile. Encouragingly, Marqeta was able to impressively expand its gross margins last quarter.
Meanwhile, Marqeta is a first mover in modern credit and debit card issuing technology, with a highly diverse set of customers. Its API platform allows issuers to tailor card properties quickly and with great flexibility.
For instance, Instacart uses Marqeta's platform to put a specific amount on a delivery person's card, who is only able to use it for certain items. Digital banks, crypto brokerages, buy-now pay-later platforms, and even legacy banks are now using Marqeta's technology to better monitor and tailor cash management practices and rewards programs across their businesses.
Marqeta does have one large risk. Block, as well as Afterpay, which Block just acquired, were each big customers, and those combined companies accounted for 69% of Marqeta's revenue last quarter. The contract with Block is up in 2024, and while these companies have a close partnership, that kind of customer concentration is clearly giving investors some angst.
However, Block also has 1.1 million warrants to purchase Marqeta shares at $0.01 per share, should it hit certain volume milestones. So Block would be sacrificing the upside of that ownership if it walked away from Marqeta's industry-leading platform.
Marqeta grew revenue 53% last quarter, and it only still processes a small fraction of card volume in the U.S. and globally. At only 6 times sales and less than 4 times sales after factoring out its cash, Marqeta should survive this downturn and has a bright future ahead.
