Who's the next buyout candidate?
This is by no means an easy question to answer. Smart
investors seeking the next ripe apple to fall have a lot to look at, including business fundamentals, market leadership and trophy holdings in a company's asset base.
I like to look at cash. Companies with a lot of free cash -- that is, unencumbered by other business needs -- attract me.
Why? Because the buying company can do anything it wants to with the cash, including financing the acquisition. And because it lowers acquisition risk, free cash is probably the most tangible asset there is.
So how do you find companies with a lot of free cash? Well, it's not so easy, at least for individual investors -- professional screening tools that do it aren't generally available.
While individuals can find cash-rich companies by looking at financial statements, automating the process is pretty tough.
When I looked for a cash screener in commonly available investment portals and broker platforms, I didn't find much. The closest solution came from Fidelity Investments, but you must have an account (although it can be just a retirement account).
Fidelity's screener can search by the "cash to price ratio." Defined as it sounds, this ratio calculates balance-sheet cash per share as a percentage of share value. A cash/price ratio of 0.25, for instance, means that 25% of the share price is covered by cash on hand.
Click here for the video version of this story from Jennifer Openshaw.