Cash is King, people say. This statement is true in stock investing as well. Companies that are solid has plenty of cash and little debt on its balance sheet. Granted that the share price have reflected some of this but your investment would be spared during business downturn. This doesn't mean that any companies with positive net cash will do well. The driver of stock price is eventually its ability to generate sustainable profit. Hence, our policy is to find investments with significant positive net cash and evaluate from there. We made the cash rich list back in 2005. Let's see how they have performed this past couple of years.
Company
Price (07/11/05)
Recent Price
Return
Sharper Image (SHRP)
$ 12.89
$ 4.81
- 62.7%
King Pharmaceuticals (KG)
$ 10.81
$ 14.26
31.9%
Creative Technology Ltd (CREAF)
$ 6.40
$ 3.85
- 39.8%
ATI Technologies Inc. (ATYT)
$ 12.93
$ 21.20 (*)
63.9%
Sigmatel Inc. (SGTL)
$ 16.59
$ 2.70
- 83.7%
PetroKazakhstan Inc. (PKZ)
$ 37.80
$ 55.00 (*)
45.5%
(*) Acquired
As you can see, it is not always smooth sailing with these investments. If you put $ 1000 each on these investments (for a total investment of $ 6000), your total portfolio would have lost 9.25%. Of course, we are cherry picking here and there is no guarantee that investments with significant positive net cash will affect the gain or loss of your portfolio.
What you have to do is to combine this positive net cash investments with the concept of fair value. If you would like a 6% return on your stock investment then you should pick a stock with fair value of 1/6% or 16.6 times P/E value. Next step is to buy this stock below fair value since buying a stock at fair value will give you zero return. Once you have this combination, there is very little chance that an investment would go bad. Of course in practice, determining the fair value of a common stock is the hardest part of all. Despite that, here is the list of cash rich companies that we are looking at
Company
Recent Trade (09/11/07)
Net Cash per Share
Expected EPS
Info Space Inc. (INSP)
$ 13.11
$ 5.97
- $ 1.64
Palm Inc. (PALM)
$ 14.92
$ 5.24
$ 0.42
Netflix Inc. (NFLX)
$ 17.63
$ 5.62
$ 0.70
Pfizer Inc. (PFE)
$ 24.00
$ 2.27
$ 2.12
Circuit City Inc. (CC)
$ 9.54
$ 1.90
$ 0.41
From share price relative to the net cash position, it seems like Info Space is the most interesting play out there. However, it is expected to post a loss, which can dwindle its net cash position going forward. Next in line would be Netflix which has a high net cash per share with some profits going forward. Also, Pfizer can be a good investment should it continue to deliver its expected EPS continuously. However, the company has been dogged with future patent expiration of its blockbuster cholesterol franchise, Lipitor which may wipe up as much as 30% of its revenue. Thus, there is no gain with no risk here.
Company
Price (07/11/05)
Recent Price
Return
Sharper Image (SHRP)
$ 12.89
$ 4.81
- 62.7%
King Pharmaceuticals (KG)
$ 10.81
$ 14.26
31.9%
Creative Technology Ltd (CREAF)
$ 6.40
$ 3.85
- 39.8%
ATI Technologies Inc. (ATYT)
$ 12.93
$ 21.20 (*)
63.9%
Sigmatel Inc. (SGTL)
$ 16.59
$ 2.70
- 83.7%
PetroKazakhstan Inc. (PKZ)
$ 37.80
$ 55.00 (*)
45.5%
(*) Acquired
As you can see, it is not always smooth sailing with these investments. If you put $ 1000 each on these investments (for a total investment of $ 6000), your total portfolio would have lost 9.25%. Of course, we are cherry picking here and there is no guarantee that investments with significant positive net cash will affect the gain or loss of your portfolio.
What you have to do is to combine this positive net cash investments with the concept of fair value. If you would like a 6% return on your stock investment then you should pick a stock with fair value of 1/6% or 16.6 times P/E value. Next step is to buy this stock below fair value since buying a stock at fair value will give you zero return. Once you have this combination, there is very little chance that an investment would go bad. Of course in practice, determining the fair value of a common stock is the hardest part of all. Despite that, here is the list of cash rich companies that we are looking at
Company
Recent Trade (09/11/07)
Net Cash per Share
Expected EPS
Info Space Inc. (INSP)
$ 13.11
$ 5.97
- $ 1.64
Palm Inc. (PALM)
$ 14.92
$ 5.24
$ 0.42
Netflix Inc. (NFLX)
$ 17.63
$ 5.62
$ 0.70
Pfizer Inc. (PFE)
$ 24.00
$ 2.27
$ 2.12
Circuit City Inc. (CC)
$ 9.54
$ 1.90
$ 0.41
From share price relative to the net cash position, it seems like Info Space is the most interesting play out there. However, it is expected to post a loss, which can dwindle its net cash position going forward. Next in line would be Netflix which has a high net cash per share with some profits going forward. Also, Pfizer can be a good investment should it continue to deliver its expected EPS continuously. However, the company has been dogged with future patent expiration of its blockbuster cholesterol franchise, Lipitor which may wipe up as much as 30% of its revenue. Thus, there is no gain with no risk here.