BALTIMORE (Stockpickr) -- Want to triple your investing returns this summer? Then tell your portfolio to show you the money...
Put simply, cash still matters in 2014. That's something that's been made very clear by the barrage of M&A activity that's hit the books in the last quarter. Cash also provides a defense against market corrections – firms with large cash positions on their balance sheets have a fundamental backstop that lets them hold their ground better than the rest of the market. But don't think for a second that protecting your portfolio with cash-rich stocks comes at the expense of performance...
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.
There's no shortage of cash floating around the market right now – in total U.S. stocks hold more than $1.53 trillion. That means that more than a quarter of the S&P's current price tag is covered by cash in the bank. As a percentage of total assets, those are levels not seen since the 1970s.
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 300% in the last decade...
Topping our list of cash-rich companies is News Corp. (NWSA), the media company behind brands like The Wall Street Journal, The Times, and Foxtel. News Corp. celebrated its one-year anniversary in its current iteration just a month ago, after spinning off from 21st Century Fox (FOXA) last July. Today, the company comes with quite a bit of cash on hand -– the firm's $3.14 billion net cash works out to a whopping 32% of its current market capitalization.
In a market where investors are complaining about a lack of bargain opportunities, that huge discount on shares of News Corp. is worth paying attention to.
NWSA isn't without challenges –- print media has been under pressure for years now, and legacy assets like book publisher HarperCollins could be a further drag. That said, News Corp. is cash flow positive in its present form, and the firm has an enviable amount of dry powder ready for acquisitions. Some of the most exciting investments are the ones that live outside of NWSA's print media wheelhouse: exposure to partially-owned TV carrier Foxtel and online real estate classified provider REA Group in Australia are great examples of that.
Ironically, it's the fact that News Corp.'s predecessor took part in some utterly terrible acquisitions that could help dissipate some of the risks of bad bets at the new company. Names like MySpace (it paid $580 million for the website in 2005, only to sell it for $35 million in 2011) are cautionary tales for News Corp.'s management team. If NWSA can affect some transformational buys in the next few years, investors should collect a premium for shares.
Mid-cap construction and engineering firm KBR (KBR) is another name with a mountain of cash sitting on the books. The firm currently sports $895 million in net cash on its balance sheet, enough to cover 29% of its current price per share. That effectively reduces the risks of this contractor's share price by a third.
KBR is an engineering and construction services contractor that primarily serves the U.S. government and the energy sector. Until 2006, KBR was a unit of Halliburton (HAL), a connection that gives it deep-rooted connections with the oil and gas business, where the firm has transitioned much of its sales efforts. Prior to that, KBR's bread and butter was the sole contractor of food service, utilities, laundry, and other services for U.S. troops in Iraq and Afghanistan – but that changed after a series of missteps from KBR that prompted the government to add other contractors to the current iteration of the LOGCAP contract.
Bigger exposure to the private sector is a good thing -– restructuring efforts and a new management team should help steer the ship around. It's that huge cash position that helps to make KBR worth a closer look in 2014. While it's more speculative than the other names on our cash-rich list, it's also the one with the most upside potential on near-term catalysts.
Nvidia (NVDA) is having a good run in 2014 – since the calendar flipped to January, shares of the graphics card maker have rallied 18%, quadrupling the gains investors have gotten from the S&P 500 over the same stretch. And Nvidia could be primed for more of the same thanks to a new product pipeline and a massive cash position.
Following AMD's (AMD) acquisition of ATI Technologies in 2006, Nvidia became the sole pure-play graphics chipmaker on the market. And as PCs largely become commoditized, Nvidia remains one of a few component makers that's able to still earn deep margins for its efforts; last quarter net profit margins clocked in at 12.4%. But Nvidia is branching out beyond graphics cards too -- it's investing heavily in supercomputing R&D, as well as server and mobile graphics offerings. And new consumer products like the SHIELD portable gaming device are putting new markets on Nvidia's radar.
From a financial standpoint, NVDA is in stellar shape, with $3 billion in net cash. That's enough cash to cover 29% of the firm's current market cap – that also drops NVDA's ex-cash P/E ratio down to 15.4. That's 40% lower than the earnings multiple on the average technology sector stock today...
Marvell Technology Group
Marvell Technology Group (MRVL) is another cash-rich chip stock that's making our list today. MRVL currently boasts $1.14 billion in the bank, a cash stake that adds up to nearly $2.25 per share, or 17% of Marvell's current share price as of this writing. Like with Nvidia, that big cash position knocks MRVL's ex-cash P/E down to a gaunt 15.
Marvell designs chips, primarily supplying control chips to hard drive manufacturers. That's been a powerful business in recent years, thanks to booming demand for computer storage. But as drives have become increasingly commoditized, Marvell has expanded its focus, building a big business in Wi-Fi chips for consumer devices like the Xbox One. As those chips make their way into more devices, Marvell stands to see considerable upside potential.
One unique thing about Marvell's business is the fact that it doesn't own its own manufacturing facilities – instead, the firm outsources chip production to third-party foundries. While that structure adds some costs to MRVL's chips on a per-unit basis, it means that the firm is able to lean out its operations immediately during cyclical downturns in the chip business. In short, MRVL trades for a bigger discount than it should right now. That said, I'd recommend waiting for a technical move before jumping in – shares have been trending lower since the start of the summer.
Last up is Amdocs (DOX), a software and service provider to telecom companies. The firm's products help telcos manage orders, billing, and customer relationships, filling a mission-critical role for communications companies around the world.
Amdocs' revenues are primarily generated by long-term service contracts, a source of recurring revenues with a high likelihood of renewal. Because customers deeply integrate their data with Amdocs' tools, switching costs are very high for telcos thinking about jumping ship to a rival business support system provider. Likewise, because DOX is established as the leader in the telecom niche, it's more difficult for generalist rivals to come in and poach its clients.
More than a third of DOX's revenues come from abroad; that's a big enough number to give the firm the scale it needs in overseas markets, but it's small enough that there's still considerable untapped potential revenue out in the marketplace. Financially speaking, DOX is in stellar shape, with more than $1.17 billion in net cash at last count. That's a lot of cash stuffed in the coffers for a firm with a $6.65 billion market capitalization. Look for earnings on August 21 as a potential upside catalyst.
To see these value-centric names in action, check out the Cash Rich Buys portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.
Follow Jonas on Twitter @JonasElmerraji