How Do Cash-Rich Companies Perform?

Following a poor quarterly performance for most of the major averages, investors seeking opportunities for the rest of the year may want to look at companies with the potential to weather any potential "double dips". One of the metrics that is closely watched by Wall Street is the amount of cash companies have put aside for strategic investments, growth initiatives, or as a hedge for a new downturn.

>>> The Biggest Cash Holdings in the S&P 500

During a recession especially, cash is king, since companies can take advantage of depreciated stock values to consider mergers and acquisitions, invest in new products, venture into new markets, buyback shares or simply lower their debt.

One way investors may gain further insight into such holdings is by looking at liquid assets such as cash and short-term investments in relation to total assets and revenues in the context of overall industry ratios as well. Going into the next earnings season, the change in cash levels from previous quarters may also provide insight into whether companies are hoarding cash or more money is being spent.

While cash available certainly provides a margin of safety, it is not the only metric that should be considered. The table below includes a sample of 15 of the riches companies in the S&P 500 with total cash and short-term investments to total asset ratios greater than 25%, along with their stock performance in the past two years and so far in 2010. The screen excludes financial companies such as banks, since by definition, they have a lot of cash.

Data source: CNBC Analytics & Capital IQ

Send comments