Updated with comments from Jim Cramer on stocks to own.
BALTIMORE (Stockpickr) -- It takes money to make money -- or so the old saying goes. Turns out, that's pretty good advice for stock-market investors.
If you want to make money in the stock market, search for companies that have money. Historically, the companies with the most cash also tend to generate much bigger returns than the rest of the market. For instance, during 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 during the same period.
Why do cash-rich companies do better for investors?
In short, cash provides options. Companies 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 merger-and-acquisition opportunities and internal investments.
The good news is that there's no shortage of cash in the marketplace today. Companies in the S&P 500 hold about $1.75 trillion in cash and marketable securities, the highest cash cushion in corporate history. Ironically, the most cash-rich stocks also tend to trade at a discount for holding big net cash balances on their balance sheets.
With the possibility of an interest-rate hike from the Federal Reserve later this year, that huge cash reserve could soon look at lot more valuable to investors who buy now.
To find some attractive investment opportunities in these cash-rich stocks, we're taking a closer look at five of them.
It's hard to talk about cash-rich companies without bringing up Apple (AAPL). After all, this technology giant holds more cash than any other company in the world -- almost $150 billion in net cash and investments at current price levels. So while Apple's $734 billion market capitalization is certainly massive, it suddenly looks a whole lot less lofty when you consider that Apple could theoretically buy about 18% of its current share base at current price levels with cash on hand.
Apple doesn't need much in the way of an introduction. The company is one of the biggest consumer-electronics manufacturers on the planet, with hugely successful product lines such as the iPhone, iPad and Macintosh computer. Apple is also the largest retailer of digital media in the world through its iTunes Store.
One critical part of Apple's success is its vertical integration. By maintaining control of both hardware and software from the ground up, the company is able to save costs on hardware specs but still outperform competing devices in performance and user experience by fine-tuning software.
Consumers living in the Apple ecosystem have relatively high switching costs. Because it's incredibly convenient to use Apple's iCloud to share personal data as well as purchased music, movies and television content across all of your devices, consumers who buy a PC, phone or tablet from Apple are likely to keep upgrading within the family.
Financially speaking, Apple is priced like a zero-growth company. Shares now trade for just 15.8 times trailing earnings, which is a pretty tepid valuation given the lofty multiples being put on other tech stocks right now. But pull cash out of the equation, and Apple's price-to-earnings ratio drops to a bargain-level 12.9.
"I think people should own Apple, not trade it, and this cash position is another reason buttressing my argument," said TheStreet's Jim Cramer, Portfolio Manager of the Action Alerts PLUS Charitable Trust Portfolio.
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Investors who get fixated on Apple's huge size are missing out on a bigger buying opportunity here.
2015 has been a pretty rough year for Yahoo! (YHOO). That's not hugely surprising. Yahoo! is in many ways a ghost of the dot-com era. Rivals overtook the company's most valuable assets in market share long ago, putting Yahoo! far enough behind the curve that it opted to completely outsource its search algorithm. But Yahoo! really is the (not so) little tech stock that could -- and investors who underestimate it could be missing out.
After all, Yahoo! still owns some of the most popular Web sites on the Internet. The company generated about $4.6 billion from search and display advertising last year, proving that even though Yahoo! lacks a lot of the cachet it enjoyed 15 years ago, it's still a very viable business.
Maybe more important, it owns some other very viable businesses. For example, it plans on spinning off its 16.3% stake in Alibaba Group (BABA) later this year in a move that should be worth about $35 per share for Yahoo shareholders.
When all is said and done, Yahoo! has about $35.5 billion in net cash and investments, enough to nearly pay for its entire valuation today. It's hard to overstate just how cheap that makes Yahoo! relative to the rest of this market. (Alibaba also happens to be pretty cash-rich itself, with $11.3 billion in net cash and investments.)
Even if the turnaround story at legacy Yahoo! is happening slower than Wall Street had hoped, shares of this cash-rich company are trading for a deal right now.
It doesn't take an expert to tell you that the energy sector has been a bloodbath lately. But refiners have been one standout in the industry. With limited exposure to energy commodities themselves, refineries have been benefiting from tumbling input costs in 2015, converting cheap crude into products whose prices have been slower to drop.
Phillips 66 owns 15 refineries around the world that have the capacity to process more than 2.4 million barrels of crude oil per day. Phillips 66 also owns a midstream business with about 62,000 miles of pipeline, as well as a chemical joint venture that makes petrochemicals and plastics. After spinning off from ConocoPhillips (COP) in 2012, Phillips 66 has been selling its underperforming assets, freeing up cash in the process.
Today, Phillips 66 has almost $7 billion in net cash and investments -- enough to pay for about 16.5% of its current shares outstanding. Historically, Phillips has been an excellent steward of shareholder capital, opting to return cash through buybacks and dividends, and so as the company's cash cushion gets fatter in 2015, expect management to share more of it with shareholders.
Hard-drive maker Western Digital (WDC) is a cash-rich company that's fallen out of favor with investors this year. Since the calendar flipped to January, Western Digital has seen its share price slide by more than 17%, making it a notably bad performer. But all that hate might just be a little overblown, especially when factoring Western Digital's hefty cash position.
Western Digital is one of the biggest hard-drive makers in the world. That's a business that's fallen out of favor due to commoditization, even though demand for data-storage capacity continues to rise at a breakneck pace. To counter the challenges in the hard-drive market, Western Digital has been boosting its abilities in the solid-state-drive market, as its SSD revenue has increased almost 10-fold during the last two years. By leveraging existing relationships with equipment manufacturers to sell solid-state drives, Western Digital should be able to keep big-margin revenue flowing onto its income statement.
In the meantime, SSD sales still represent a relatively small portion of revenue. But the huge profitability that the company earned during the fat years added up to a large net cash and investment position of nearly $2.5 billion, enough to pay for more than 11% of the company's shares outstanding at current price levels. Excluding cash, Western Digital trades at a P/E ratio of just 12.3, making it another bargain-priced large-cap tech stock.
Look for fourth-quarter earnings at the end of next month as a potential catalyst for upside. Western Digital was one of 21 stocks Jefferies recommended for the second half of 2015.
Finally, there's Foot Locker (FL). This $8.6 billion athletic-apparel retailer has rallied more than 12% year-to-date, and its best days could still be ahead as the company takes advantage of an $853 billion net cash position to boost investor returns this year. That big cash cushion adds up to nearly 10% of Foot Locker's current market value.
Foot Locker is one of the world's biggest sellers of footwear and athletic apparel, operating a network of 3,460 stores worldwide. Besides its namesake brand, it operates stores under another eight brands, including Champs Sports and Runners Point. By focusing its sights on branded apparel, Foot Locker is able to take bigger markups than most retailers. Because sports apparel is one of the most attainable status symbols, Foot Locker has been able to benefit disproportionately from the last few years' uptick in consumer spending, as sales have increased by more than 16% since 2013.
And while the brick-and-mortar retail business is capital intense, Foot Locker has managed to build a huge store footprint while avoiding debt and piling on cash. Management plans to repurchase up to $1 billion in stock during the next two-and-a-half years, returning a meaningful chunk of the company's dry powder to shareholders. That capital return should significantly boost Foot Locker's performance, especially as the market grinds sideways this year.