Is cash king, or is cash trash? If you're an investor, the question has never been so pertinent or pervasive. Dozens of major corporations reacted to the recession the same way consumers did: They started paying off debts and building up cash reserves. The industrial companies in the Standard & Poor's 500 Index ($INX) are now sitting on a record stockpile, estimated by S&P at $959 billion.
This situation presents tremendous opportunities and enormous challenges. Experts say investors' fortunes could be made or broken depending on how the companies handle their cash.
"You have to look at each company individually and figure out what they're going to do with their treasure trove," says Mark Boyar, principal at Boyar's Intrinsic Value Research in New York. "Some companies will squander the money. Others will use it to significantly improve their performance."
Gigantic cash hoards have become important for several reasons. First, cash gives companies staying power and flexibility. Sitting on billions of dollars of easy-to-access capital gives them the potential to start or boost dividends, buy back shares and turbocharge future growth by purchasing other companies or investing in new facilities, technology and brainpower.
But in today's low-interest-rate environment, cash can also be a negative for companies -- and by extension, their investors -- because it doesn't generate much income.
With that in mind, many savvy money managers are scrutinizing cash-rich companies, trying to find the relative handful that have the capital and expertise to use their money wisely. It's not an easy analysis. Some experts, for example, say they've been nervously picking up shares of one of the nation's fattest cash cows, Microsoft (MSFT, news), which is sitting on a stockpile of nearly $50 billion. (Microsoft owns and publishes MSN Money.)
Why nervously? The stock looks cheap, selling for less than 10 times estimated earnings for the fiscal year that ends in June 2012. But Microsoft also has a sorry history when it comes to deploying its assets, spending billions on ill-fated products such as the forgettable Zune music player, for example, and making disappointing acquisitions, including the $6 billion purchase of aQuantive in 2007. Now Microsoft is getting ready to spend $8.5 billion on Skype, the Internet phone service.
"There seems to be universal agreement that Microsoft overpaid," says John Osterweis, co-manager of the mid-cap Osterweis (OSTFX)fund. "But if Skype makes sense strategically, it is going to turn out to be very wise."
The bottom line: Although a large number of savvy bargain hunters own Microsoft, even some of those who hold the shares are reluctant to recommend them.
The following six companies, by contrast, get the nod because they are not only cash-rich but have executives who know what to do with all that moola. Plus, their stocks are relatively cheap.
A bargain growing at a blistering pace
Shares of Apple (AAPL, news)may have more than quadrupled since January 2009, but they're still a deal. Benefiting from blistering sales of its iPhones and iPads, Apple has generated such rapid profit growth that its stock sells for just 14 times estimated earnings.
"When you look at how profitable Apple is and the earnings and cash flow it is generating, it is not expensive at all," says James Ragan, an analyst at Crowell, Weedon in Los Angeles.
For a company of its size, Apple's growth has been nothing short of stunning. Sales rose 52%, and earnings soared -- up 70% in the year that ended last September. Analysts expect profits to jump 63% in the current fiscal year, due in part to the iPad, the most successful consumer-product launch in history.
Apple's 323 retail stores -- airy shops where consumers can test, repair and buy products -- generate annual sales of $43 million, on average. To put that in perspective, a typical Home Depot (HD, news), which is more than 10 times the size of an average Apple store, does $30 million in revenue, says Ragan.
According to a recent filing with the Securities and Exchange Commission, Apple will put some of its $29 billion in cash to work by adding 50 stores over the next year. (Apple's balance sheet also includes $36.5 billion in "long-term marketable securities," suggesting that the company has more than $65 billion to play with.) But there is no indication that Apple plans on paying a dividend anytime soon.
Meanwhile, the poor health of CEO Steve Jobs weighs heavily on the stock. The shares have mostly meandered since Jobs, widely believed to be Apple's creative genius, went on medical leave in mid-January. But the risk of a Jobs-less Apple is one that Joe Milano, manager of T. Rowe Price New America Growth (PRWAX), is willing to take. "I'm still buying," he says.
