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All This "Dead Cash" Is Disguising Crazy Cheap StocksBy
Friday, September 3, 2010
Who's got the cash these days?
Nobody here in Florida... Every other homeowner (one in two) is "underwater" here – their property is worth less than their mortgage. And one out of four Florida homeowners is currently delinquent on his mortgage payments.
Nobody in government has the cash, either... From the local level to the national level, governments are more indebted than ever.
So who's got the cash? It's Corporate America...
Microsoft tops the list, with $31 billion in net cash (cash minus debt). Google isn't far behind at $31 billion.
Cisco and Apple are next, with $24 billion to $25 billion in net cash. Intel deserves an honorable mention, with $16 billion in net cash.
The thing is, this "dead cash" makes these tech giants look more expensive than they really are...
Big-name tech stocks are cheap today. They're as cheap as they've been since the late 1980s, based on their forward price-to-earnings (P/E) ratios. But when you subtract out their cash, these companies get "stupid cheap."
Take shares of Dell Computer, for example... Dell traded at a P/E ratio of over 100 back in 1999, during the dot-com boom. Today, Dell trades at a forward P/E ratio of just 8. Said another way, Dell is 92% cheaper today than it was eleven years ago.
And that's not taking into account Dell's huge pile of cash. Subtract that, and Dell is even cheaper...
As of its most recent quarterly results, Dell had over $12 billion in cash – about half its stock market value. It has $5 billion in debt. So it's sitting on $7 billion in net cash. If you subtract that from Dell's market value, its shares are trading at a lowly forward P/E ratio of just 6.
Is Dell going out of business in the next six years? Well, it's priced as if it is...
I'm not saying you should buy Dell – but it has the cash. All the companies above do. And when you subtract out their huge net-cash piles, they're crazy cheap. As a group, the average forward P/E ratio of those tech companies is in the single digits.
Big tech is downright cheap. And it's generally ignored. I like to see both of those things.
Once a legitimate uptrend appears to confirm this idea, I'll be a buyer of big tech.
Good investing,
Steve
Further Reading:
Companies that have more cash than they know what to do with are perfect "safe haven" investments if you're looking for higher-than-CD levels of return. First, they're invulnerable to a credit crunch. Second, they pay big dividends. And the third benefit of cash boxes is "pure gravy for the income investor." Find out what it is here: The Only Way I Know to Get High Income from Safe Investments.
Market NotesTHE SECRET TO INVESTING IN "CHINDIA" Today's note contains a powerful investment secret.
It's one that will allow you to make an investment fortune from the biggest long-term investment trend in the world: the economic rise of Asia, led by the 3 billion-plus folks in China and India (aka "Chindia").
The secret: If you want to make money investing in emerging economies, take the seasoned investor's approach... Don't try to figure out the right "high-tech" plays, just own companies that supply "the basics," like coal, soda, beer, and cigarettes. Boring products like beer and cigarettes enjoy steady, unrelenting demand... and there's scant risk that a new technology will make having a beer after work obsolete. Plus, well-run companies in these industries generate huge cash flow and big dividends.
For proof of this secret at work, we present the big uptrend in Philip Morris International (PM). The company is the international offshoot of U.S. cigarette powerhouse Altria, which makes it the largest international vendor of cigarettes in the world... and a direct play on the world's growing middle class, much of which is in Asia.
Of the top 15 brands in international markets, PM owns seven. Our colleague Dan Ferris has pounded the table on this stock for over two years. As you can see, Dan's advice has been dead on. While stocks in general are down this year, PM is sitting near an all-time high. When it comes to investing in international growth, it pays to stick with the proven basics.
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