BALTIMORE (Stockpickr) -- There's blood in the water this week. That's the explanation for the second-biggest selloff of the summer yesterday, a decline that shoved the S&P 500 down 1.5% on Tuesday and touched 2% lower on the Nasdaq Composite.
Investor anxiety has been the overarching thread across the markets for the last few months, so it's not surprising that we're seeing stocks give something back in August. The fact is, we're still very much in a rallying market right now -- just 4.5% off from all-time highs as I write.
That's a correction, not a crash.
But it still makes sense to go defensive with cash-rich stocks right now. Not just to avoid losses as the market corrects -- but also to triple your gains on the way up.
You don't have to take my word for it; over the last decade, the top tier of cash-rich stocks worldwide generated total returns of 297%. That's triple what the S&P earned over the same period. Yes, cash is still king this year.
Part of that stellar outperformance has to do with what cash enables companies to do. Capital gains are great, but historically speaking, the majority of portfolio growth comes from other sources. Dividends, share buybacks and debt repurchases all inject value directly into your shares, and on a year-to-year basis, they also account for around 50% of annual stock performance. Only companies with cash that have the wherewithal to boost those payouts on command.
In short, cash provides options. Firms with cash can opt to increase shareholder value by paying a dividend or initiating a share buyback. Plus, they have the ability to take advantage of pricey M&A opportunities and internal investments.
Lots of companies have big cash positions right now. In fact, more than 25% of the S&P 500's valuation is made up of the record cash holdings on corporate balance sheets. That means that it pays to be a little more selective with which companies you consider cash-rich.
To do that, we'll focus on firms that fit the tight set of quantitative criteria that beat the S&P by a factor of three. Today, we'll take a look at five of them.
Up first is Activision Blizzard (ATVI), a stock that's made my list of cash-rich companies for a while now. Of course, this $18 billion video game publisher has also turned out some stellar performance in 2013, rallying 51% since the calendar flipped over to January. With more than $4.3 billion in net cash, ATVI looks cheap despite its huge returns this year. Ex-cash, the stock's P/E ratio comes in at a gaunt 10.3.
Activision Blizzard built that huge cash position with one of the most attractive business models in the video game industry. The firm owns some of the hottest video game franchises in the world, including Call of Duty, World of Warcraft and Diablo. But Activision doesn't just sell games -- it also earns revenues on an ongoing basis through subscription-based multiplayer games like World of Warcraft.
WoW's 8 million subscribers provide substantial low-effort cash for ATVI. And because gamers have a massive sunk cost in building characters and attaining status, they're a lot less likely to switch to a competing franchise and restart the process. Not surprisingly, the firm has been hard at work to bring a similar model to its other franchises. Right now, around a quarter of ATVI's market capitalization is paid for in cash.
That dramatically reduces the risks associated with buying shares right now.
2013 has been a strong year for shares of NetApp (NTAP) too -- just not quite as strong as Activision's. NTAP has seen its shares rally close to 24% year-to-date, outpacing the S&P's climb by nearly 10% this year. And again, NetApp's huge net cash position washes a lot of the risk out of shares.
NetApp sells data management hardware, software and services to enterprise IT customers across the world. The firm's biggest business comes from selling network attached storage, devices that can connect to clients' existing networks to boost capacity without other huge changes to their existing tech infrastructure. That makes it an ideal vendor for firms whose storage needs are gradually increasing (and those who don't want to shell out massive capital for all-new IT infrastructure). As cloud computing continues to ramp up demand for computer storage, NTAP is finding itself on the right side of a very lucrative trend.
That trend has transformed into cash. Right now, NetApp has $4.09 billion in cold, hard cash on its balance sheet -- a safety net that covers 27% of this stock's current market capitalization. As long as management can figure out a smart way to earn returns on that big cash balance (or return it to shareholders), expect NTAP to perform well.
NetApp isn't the only computer storage stock that's flush with cash. Western Digital (WDC) is another.
Western Digital is the largest hard drive maker in the world, thanks to last year's acquisition of Hitachi Global Storage Technologies. The firm's customers include enterprise IT departments and original equipment manufacturers as well as consumer technology retailers, who sell WDC's popular line of internal and external hard drives.
The exact same growing demand for data that's boosting NTAP is providing tailwinds for Western Digital right now. On the consumer side, one of the biggest changes has been individuals' data needs. Today, more consumers than ever before carry around high-definition cell phone cameras capable of consuming gigabytes of storage capacity in minutes -- data that's generally backed up across multiple devices. As data needs continue to increase, WDC should continue to be one of the biggest beneficiaries.
The transition to newer technologies like flash memory does pose some threats to WDC. But the firm is fighting back the best way. By using some of its $2.35 billion net cash position to acquire flash memory makers like Stec (STEC). The firm's hefty cash balance gives it the ability to ramp up its investments in flash to avoid falling behind as prices fall for the technology.
Online auction site eBay (EBAY) is no slouch in the cash category the firm's net cash stands at more than $2.3 billion. Add investments into that number, and eBay's wherewithal jumps to $8.4 billion. That's a substantial cash cushion, even for a $65 billion firm like eBay. It's enough to cancel out 13% of the firm's outstanding shares, for example, or enough to bring the firm's lofty price-to-earnings ratio down to a more manageable 21.
eBay is one of the largest marketplaces in the world. The trading platform moved more than $75 billion in merchandise last year, with eBay collecting a fee for every item along the way. eBay's popularity has helped to create a true payment processing standard in PayPal, which itself moved more than 20% of global online payments last year. That's a jaw-dropping stat for eBay investors. Right now, PayPal boasts more active users than some of the second-tier payment card names, giving it a huge pool of users to sell merchants on. As the network makes its way into brick-and-mortar stores, it's very conceivable that eBay's auction site could eventually become a side-business for the firm, not the other way around. That said, some of PayPal's policies are very unfriendly to customers, a stark contrast to conventional payment processors. The firm will need to work on its bedside manner if it wants to continue to grow its userbase.
Meanwhile, auctions still make up the biggest part of the business. By being on both sides of auction transactions (eBay caters to both buyers and sellers), the firm has found a lucrative business catering to small business, with everything from shopping cart software to invoicing platforms. Investors should appreciate the fact that eBay tends to focus on entering new markets that are instantly monetized -- unlike some of its conspicuous tech sector peers.
Last up is semiconductor firm Altera (ALTR), a leader in the programmable logic device market, a subset of chips that can have their circuitry reprogrammed by the manufacturer's clients. Altera's customers include original equipment manufacturers of everything from communications devices to automobile components.
PLDs have historically been a costlier way to add features to a device. But as prices drop, Altera is opening itself up to new markets that were constrained by chip costs in the past. The flexibility that a PLD provides manufacturers make them perfectly suited to lower-volume product runs, especially in applications like industrial, communications, or automotive technology. A production deal with Intel (INTC) gives Altera access to the most advanced manufacturing facilities in the world, enabling the firm to compete with cutting edge purpose-built chips.
Not that Altera has had difficulty competing lately. The firm's balance sheet has been growing steadily, to the point where ALTR currently carries $2.3 billion in net cash on its balance sheet. Expect strategic investments and share buybacks to be management's best bets at freeing up that cash for investors' benefit.
To see these value-centric names in action, check out the Cash Rich Buys Fall 2013 portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.