BALTIMORE (Stockpickr) -- Believe it or not, cash is still king in 2014.
January's correction was a pretty jarring reminder that investors are a fickle bunch. They can go from feeling great about the bull market to feeling like the market is too "frothy" in a matter of market sessions. But owning companies with cash protects against a lot of downside risk -- it's like a fundamental backstop on shares.
Even better, owning cash-rich companies isn't a performance drag on your portfolio. In fact, it's a capital gains booster: over the last decade, the top tier of cash-rich stocks worldwide generated total returns of 297%. That's triple what the S&P 500 earned over the same period. So yes, I mean it when I say cash is still king this year.
It's not hard to find either. With more than $1.25 trillion sitting on corporate balance sheets of S&P component stocks, U.S. companies have never held more cash on their books before on an absolute basis. And as a percentage of assets, cash has reached a level that's been unheard of since the 1970s. Around 25% of the S&P's current price tag is covered by cash in the bank.
The benefits of big cash holdings come from what they enable companies to do. Capital gains are great, but historically speaking, the majority of portfolio growth comes from other sources. Dividends, share buybacks and debt repurchases all inject value directly into your shares, and on a year-to-year basis, they also account for around 50% of annual stock performance. Only companies with lots of cash that have the wherewithal to boost those payouts on command.
In short, cash provides options. Firms with cash can opt to increase shareholder value by paying a dividend or initiating a share buyback. Plus, they have the ability to take advantage of pricey M&A opportunities and internal investments.
That's especially true in the tech sector, where firms have been hoarding cash at a rapid pace.
So today, we're taking a look at five firms that fit the tight set of quantitative criteria that beat the S&P by a factor of three.
Data storage stock NetApp (NTAP) is first up on our list. The firm has more than $4 billion in net cash sitting on its balance sheet right now, enough to pay for a whopping 30% of its current market capitalization. When almost a third of each dollar you invest is covered by cash in the bank, that's a pretty substantial reduction of risk. More important, it's a reduction in valuation. Adjusting for cash, NTAP sports a P/E ratio of just 13 right now.
NetApp is positioned on the right side of some substantial trends in 2014. The firm's bread and butter is data storage, a space that's been growing at a breakneck pace as greater demands for cloud services expand storage and back-up requirements. Because NetApp's network-attached storage devices can be purchased ad-hoc (rather than as part as a major datacenter overhaul), it's an ideal vendor for firms whose storage needs are gradually increasing (and those who don't want to shell out massive capital for all-new IT infrastructure).
With net margins that consistently sit in the double-digits, NTAP's cash generation capabilities aren't going anywhere soon. The firm generated more than $274 million in free cash last quarter alone. And as the firm aggressively buys back shares at arguably cheap prices, shareholders should benefit from the concentration of their positions in 2014.
Graphics chip maker Nvidia (NVDA) is another cash-rich tech name right now. Better yet, it's another bargain-priced name in 2014 that's gaining momentum this month. With more than $3.3 billion in net cash, NVDA has 33% of its current market valuation paid for in cold, hard cash.
Nvidia is the largest graphics card maker, operating a duopoly with chipmaker AMD (AMD). As PCs largely become commoditized, NVIDIA remains one of a few component makers that's able to still earn deep margins for its efforts. But the firm has been differentiating its product portfolio outside of standalone PC graphics cards, at the same time that processor makers have been upping the horsepower users can wring from integrated graphics. Supercomputing and mobile device chips offer some interesting growth avenues for NVDA in the years ahead -- and they'll help boost the attractiveness of the firm's intellectual property portfolio as well.
That's key because, at current valuation levels, NVDA looks cheap right now. A full third of the firm's market cap is paid for in cash, and its $10 billion price tag makes it a digestible M&A target for a larger suitor in the tech sector with an ample cash position of its own. NVDA is worth keeping an eye on in 2014.
Hard drive maker Western Digital (WDC) is one of the biggest computer storage makers in the world, with more than 40% of the hard drive market today. The firm's drives are found in everything from consumer PCs and standalone external drives to cars and enterprise servers. That scale gives WDC some big advantages in a hot storage market.
But hard drives are going the way of the dodo -- eventually. Solid state drives offer huge speed, shock protection and size benefits, making them ideal for high-throughput enterprise jobs and high-volume mobile device applications. The two detractors for solid state are cost and supply constraints, but as costs come down and manufacturing capacity increases, flash drives could make their way to bargain-priced components. To counter that challenge, WDC has been investing in its SSD portfolio, leveraging its fat customer rolodex to sell its flash drives to customers. The firm has ample time to scale up its SSD capabilities by the time hard disk drives lose their high-return luster.
For WDC investors, it all comes down to the cash. Right now, the firm has more than $2.3 billion in net cash on its balance sheet, a level that effectively pays for 11.4% of the firm's market capitalization. That gives Western Digital plenty of dry powder to transition to SSDs -- and to keep hiking its 1.4% dividend yield.
Symantec (SYMC) is another cash-rich tech name to watch in 2014. The firm currently carries $1.72 billion in net cash on its balance sheet, or almost $2.50 in cash per share. Symantec sells security, backup and virtualization solutions to customers ranging from end-users to large corporations. Its most well-known product is the Norton antivirus suite.
SYMC has a cash cow in Norton, particularly because the software comes preloaded by OEMs on many PCs. That big installed base gives Symantec ample opportunities to upsell its premium offerings, a job that's made easier thanks to increased awareness about risks like identity theft. On the enterprise side, Symantec's size gives the firm a discernable advantage: It has teams of engineers dedicated to protecting customers against computer threats. Smaller rivals can't keep up with the onslaught of malicious code.
But Symantec has also been unfocused in recent years. While profitability remains strong, the firm has been leaving money on the table by leaving important market demands unfulfilled. Restructuring efforts that started last year have done a good job of turning the ship around so far -- and as SYMC boosts offerings like network security, it should have little trouble selling more comprehensive solutions to IT departments that are already customers.
SYMC isn't the most exciting business out there, but a low earnings multiple and ample cash make it an exciting stock.
Last up is the most speculative name on our list of cash-rich tech companies: Sohu.com (SOHU). Sohu owns some of the most-trafficked Internet sites in China, earning revenue through paid search and advertising as well as online gaming through its Changyou unit. SOHU's $877 million net cash position adds up to 31% of the firm's current share price.
Rising Chinese Web traffic is the big tailwind in play at SOHU. The firm's web properties -- like its search site and video portal -- mirror the efforts of internet companies here in the West. Online gaming is the differentiator, though. And with Changyou making up more than half of SOHU's overall revenues, the demand is clearly there for the firm's games. That gaming arm should help give SOHU some advantages over its larger rivals in the Chinese web market.
SOHU's growth trajectory is rocky -- it doesn't possess an economic moat, but it's generating substantial traffic in all the right areas. Likewise, regulatory concerns from the Chinese government are much more muted for Sohu, which doesn't have the same cultural hang-ups in acquiescing to the government's demands that Western firms have. With momentum starting to turn higher for SOHU in 2014, this cash-rich company could be a big mover in the months ahead.
To see these value-centric names in action, check out the Cash Rich Buys portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.