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Cash
Rich Stocks: Rx for Credit Jitters
The
subprime home mortgage fiasco has triggered doubts about the viability
of credit markets in general, making lenders of all stripes reluctant to
commit to new deals. Fears of a credit meltdown are largely responsible
for the current stock market sell off.
As long as the credit markets remain in this jittery state, individuals
and corporations alike face the prospect of higher borrowing costs,
which would sink earnings, or, in the worst case, no available credit
could put a firm out of business.
No Debt - No Problem
However, it’s unlikely that the Fed would let that happen.
Eventually the credit markets will return to normal, but nobody can
predict when that will happen. In the meantime, there are many values
out there. But when rummaging through the sale racks, it’s important to
concentrate on stocks that aren’t vulnerable to credit
issues—specifically, firms that have plenty of cash and no debt.
But that’s not enough. Cash in the bank and no debt means that a firm
isn’t vulnerable to a breakdown in the credit markets, but that doesn’t
necessarily mean that its share price is headed up. For that, you need
strong earnings growth as well.
With that in mind, I’m going to describe a screen for finding stocks
with plenty of cash, no debt, and strong growth prospects.
Stock screens, if you’re not familiar with the term, are programs
available on financial websites that allow you to scan the entire market
for stocks meeting your selection criteria.
You could run the screen on a variety of different sites, but I’ll use
CNBC’s Stock Screener to demonstrate the process. CNBC, the stock market
cable channel, used to be part of the MSN Money site
(moneycentral.msn.com), but established its own site a few month’s ago.
User Friendly Screener
CNBC’s free screener, while not particularly powerful, in terms
of number of search parameters, is user friendly and up to the job.
Find it from CNBC’s homepage (www.cnbc.com)
by selecting
Stock Screener, and then, “Create Custom Screen,”
Setting up a screen is easy. For each desired search parameter, select
the appropriate category, check the desired criteria within the
category, and then specify the acceptable values.
One caveat, the screener has an annoying habit of periodically erasing
your selections and reverting back to the main Stock Screener page. You
can get around that problem by giving your screen a name and saving it.
That way, when it does revert to the main page, you can retrieve your
screen using the “Saved Screens” menu at the top. Just be sure to click
on “Save Screen Criteria” every time that you make a change.
Now, on to the details. I’ll start by with the most important factors:
plenty of cash and no debt. You’ll find the required parameters in the
“financial strength” category.
Cash Rich
The “current ratio” compares current assets such as cash,
inventories and accounts receivables to current (short-term) debts such
as payroll expenses and other current bills. The ratio would be 1 if
short-term assets equal liabilities and 2 if the assets were double the
liabilities. Since we’re looking for cash-rich firms, a ratio of 1 is
mandatory and higher is better. I specified a minimum current ratio of
2. Try lowering that minimum to 1.5 if you want to see more stocks, and
increasing it to 3 if you want to limit your results to only the most
cash-rich stocks.
The “quick ratio” is similar to current ratio except that it
doesn’t count inventories when it computes current assets. Thus it’s a
more conservative measure since inventories may not be readily
convertible to cash. I specified a minimum 1.5 quick ratio. Consider
increasing it to 2 if you want to be more conservative.
No Debt
We’ll rule out firms with long-term debt using the “debt to
equity ratio,” which compares long-term debt to shareholders equity
(book value). I require a zero ratio, which equates to no long-term
debt.
Small Adds Risk
Next, because we are in a particularly treacherous market, I’ll
avoid small-cap stocks, which are generally riskier than larger
companies.
“Market capitalization,” which is how much you’d have to shell
out to buy all of a firm’s stock is a widely used company size gauge.
Values below $1 billion reflect small-cap stocks. So, I specified a
minimum $1,000 million market-cap (“company overview” category).
Pick Fast Growers
So far, I’ve narrowed the field to cash-rich large firms with
no-debt. Next, we’ll pinpoint the fastest growers from that list using
stock analysts’ consensus (average) earnings growth forecasts.
Yes, I know that the analysts often get it wrong, especially their
buy/sell ratings, but I find their growth forecasts useful for gauging
growth prospects. I specified 10% minimum annual earnings growth for
both the current fiscal year and the next fiscal year.
Find these and the next parameter in the “analyst estimates” category.
The earnings growth figures don’t mean much if they are starting from a
tiny base, say a few cents per share. To avoid that problem, I specified
that the last 12-months earnings (labeled “reported EPS”) must be
at least 50 cents per share.
Since, in the long-term, earnings growth comes from revenue (sales)
growth, I also required that the current revenues must be at least
15% above year-ago (labeled “Current Rev % Change YoY”). Find it in the
“growth trends” category.
My screen turned up nine stocks in a variety of industries.
Nine Cash Rich Stocks
Besides for Apple (AAPL) and Google
(GOOG), which need no introduction, the list included Chinese
search engine operator Baidu.com (BIDU),
information technology consultant Cognizant Technology
(CTSH), financial information provider Factset Research
(FDS), internet-based commodities marketplace
IntercontinentalExchange (ICE), medical device
maker Intuitive Surgical (ISRG), graphics
processor maker NVIDIA (NVDA), and adult
educator Strayer Education (STRA).
As is the case for the results of any screen, consider these stocks as
candidates for further research, not a buy list.
published 8/19/07 |
