5 Stocks With a Cash Cushion

In Ovid's Fasti, the protagonist asks the god Janus why he favors cash above all the other gifts at his altar. The deity replies, "How little you know about the age you live in if you think that honey is sweeter than cash in hand."

In other words: Cash talks, and everything else walks.

Put the cash to work
Likewise, a company with a significant amount of cash on its balance sheet is attractive to investors in many ways. For instance, cash allows a company to:

• Improve its debt rating, thus reducing its cost of capital.
• Begin or increase dividend payments.
• Repurchase undervalued shares.
• Fund R&D projects even in a down market.
• Make strategic acquisitions.

Too much cash, however, can be a bad thing, since it earns a minimal return and is thus a poor use of investor capital. And for better or worse, large amounts of cash on hand also make a company an attractive takeover target.

Let's make mo' bucks
To help us determine which cash-rich companies deserve your attention, we'll enlist the help of the 100,000 investors participating in Motley Fool CAPS and the new CAPS screening tool. Among other things, we'll look for companies with at least $5 cash per share, a return on equity above 10%, and a four- or five-star CAPS rating.

Here are five of the results:

It's important to note that while each of the companies on this list is highly rated, they are offered here not as formal recommendations, but rather as starting points for further research.

Nice shootin', Tex
Connecticut-based capital equipment firm Terex supplies cranes, aerial work platforms, and other construction services around the world. Despite the company's strong performance in "an extraordinary period of history" for the industry (in the words of CEO Ronald DeFeo), Terex's share price remains 28% off its 52-week high. Moreover, Terex trades at price-to-earnings and price-to-book discounts to larger competitors Caterpillar (NYSE: CAT) and Deere (NYSE: DE), as well as to the industry at large.

So here we have a seemingly undervalued stock with about 8.5% of its market value in cash, a price-to-earnings ratio of 11, and a trailing return on equity of 30%. On the surface, it sure sounds like a value play, but is it a value trap?

First, let's take the market's perspective. Surely there must be a reason for a 28% haircut, after all.

The stock's decline began back on Oct. 24, following a lackluster earnings report that didn't impress the market. The report also came at a terrible time, with the broader market beginning to slide as fears surrounding the credit crisis mounted. Concerns about Terex's business, however, have been muted since its strong earnings report from February served to calm some nerves.

While the broader market may have been concerned about Terex's prospects, CAPS investors have hardly doubted Terex's ability to outperform the market -- Terex has remained a five-star stock for the past six months.   

One Terex bull, pencils2, had this to say about the company's long-term advantages in December 2006: "The company has a diversified product line and isn't reliant on any one customer. The areas they are in -- logging, road construction/repair, mining, etc. -- are sectors and industries that aren't going to disappear, and Terex really has a good product line to continue to gain market share, or at least hold the market share they have now."

So far, at least, it seems pencils2 was smart to back Terex, as shares are up 16.5% since the pick was made.

What do you think about Terex -- or any other stock, for that matter? Make your voice heard on Motley Fool CAPS, where 100,000 other investors are waiting to hear what you have to say. CAPS is 100% free, so what are you waiting for? Get started today.