Although things have calmed a bit, investors endured the worst two-week start to a new year in recorded history in 2016. After a small rebound, the broad-based S&P 500, which is arguably the best measure of U.S. business health, is still down more than 3% on the year.
For some investors, this poor start has induced panic: They are either scrambling for the exits, or quickly looking for alternative places to put their money that could help protect their capital if the stock market takes another turn lower. Those alternatives include U.S. Treasuries and CDs, both of which are yielding well below their historic rates. In other words, investors could be set up for long-term disappointment if they consider turning their backs on stocks just because of a little near-term turbulence.
Cash is the key
How can investors protect their capital and potentially outperform during a stock market correction or bear market? One smart move might be to invest in companies that are sporting huge cash balances. Although it's still up to each company to use its cash wisely, a healthy cash and investment position can act as a buffer that prevents a business's valuation from declining too badly when conditions around it get rough. Presumably, companies that have a lot of cash also tend to invest freely in organic and inorganic growth, and in many instances, they pay dividends as well.
But, which companies hold the most cash and investments? Based on year-end fiscal data from S&P Global Market Intelligence, these five names are rocking the highest combined cash and investment totals:
- Apple (AAPL 1.92%): $216.1 billion
- Microsoft (MSFT 4.20%): $113.8 billion
- Alphabet (GOOGL 4.61%) (GOOG 4.42%): $77.1 billion
- Cisco Systems (CSCO 0.57%): $60.4 billion
- Oracle (ORCL -0.89%): $54.4 billion
Collectively, these five companies have $521.8 billion in cash, cash equivalents, and investments, currently in their coffers. Here are some fun things you could do with $521.8 billion:
- Buy iPhone 6s for more than 800 million people;
- Purchase more than 19.7 million base-model Ford F-150s, the most popular vehicle in the U.S.;
- Cover the U.S. federal budget deficit for one year;
- Buy everyone in the world a tall Starbucks coffee every day for more than five weeks;
- Pay off the mortgages of more than 3.1 million American households.
It's worth noting that these companies also have debt on their balance sheets, but in every instance, their cash far exceeds their debt load. Additionally, it's very likely that these companies are carrying some of their cash in foreign countries to avoid the taxes they'll have to pay when they repatriate their profits.
What these cash giants have in common
Ultimately, it's no secret why these five companies are cash kings. Let's take a look at some of the common themes that make these businesses potentially great investments.
1. Dominant market share
If there's one characteristic shared by many of the above companies, it's industry-leading market share. For example, Alphabet subsidiary Google is a giant in desktop and mobile advertising, and its mobile operating system, Android, is hands-down the most popular global OS.
Google's share of the search market in October stood at nearly 64% per comScore, more than three times higher than No. 2 search engine Bing. In terms of global OS market share, Android locked up almost 85% of the market based on data released by Gartner. Add in Apple's iOS and you'd have 97.8% of all global OS market share. This dominance affords Alphabet's Google some incredible pricing power that it uses to generate healthy profits.
2. A leading brand
Another key point is that many of these companies are highly valued brands because the public can't wait to get its hands on their products. Apple would be the best example of this, with consumers still lining up around the block anytime Apple releases a new gadget, be it a smartphone, tablet, or Watch.
In 2015, Interbrand named Apple its most valuable brand in the world for the third consecutive year, a testament to the loyalty consumers continue to show the brand. Companies with strong brand value tend to extract healthy margins from their loyal customers, and they also benefit from free word-of-mouth advertising.
3. High-margin products and services
A third common theme (which builds off the prior point) is that these companies tend to generate very high margins from their products and services. Having a strong brand and dominant market share can definitely help push margins higher.
For this example, I'd highlight software developer Microsoft, which benefits from its legacy of dominance as the king of operating systems for desktops and laptops. VentureBeat noted in October 2015 that Windows maintained a ridiculous 90.4% market share as the preferred desktop and laptop OS, compared to just 8% for Mac OS and 1.6% for Linux. This high share has helped push Microsoft's trailing 12-month operating margin north of 28%.
4. Cutting-edge innovation
Finally, companies like Cisco Systems and Oracle are benefiting from next-generation innovations. For both of these companies, we're talking about the emergence and evolution of cloud-computing. This means taking advantage of enterprise customers that are looking to build or expand their data centers, or residential customers who could benefit from technology in their homes vis-à-vis the Internet of Things.
For instance, Cisco announced in May 2014 that it was planning to spend $1 billion to offer cloud-computing services. Furthermore, estimates from Cisco suggest that public cloud and private cloud compound annual growth could hit 44% and 16%, respectively, between 2014 and 2019, with global IP traffic more than quadrupling over that same timeframe. Needless to say, this is a major growth opportunity for Cisco.
The same innovation is being observed in middleware and cloud infrastructure play Oracle, which had also previously leaned heavily on its enterprise hardware to drive growth. In Oracle's second-quarter report, which was released in December, the company announced constant currency cloud sales growth of 31%, including robust 39% growth in cloud software-as-a-service. Software-as-a-service is particularly attractive since it leads to juicy margins, and SaaS customers also tend to be quite loyal.
The point? Investing in companies with a lot of cash on hand can be a smart move in a volatile investing environment. These may no longer be the market's most exciting businesses, but boring business models are often very profitable regardless of how well or poorly the U.S. economy is performing.