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10 cash-is-king stocks from a value expert
What kind of stocks do you buy in a lousy market? Stocks of companies with decent prospects, beaten-down share prices and lots of cash on hand.
By Michael Brush
In the spring of 2003, when most people thought the market was going to hell in a handbasket, we checked in with value manager John Buckingham for a list of beaten-down stocks that looked like safe plays for a rebound because of their enormous cash hoards.
Within a few months -- as the market came back -- our cash-is-king portfolio of 15 stocks was up an astonishing 100% or more.
The gains were spectacular, but perhaps not so surprising when you consider Buckinghams track record. Hes the brains behind The Prudent Speculator, a newsletter that regularly tops the list for long-term performers at The Hulbert Financial Digest. Hes also at the helm of the Al Frank Fund (VALUX). It has produced annualized returns of 8.83% over the past three years as of Aug. 6, outperforming the S&P 500 ($INX) by 11.16%, according to Morningstar.
Now that a lot of people seem to think the market is going to hell in a handbasket once again, we decided to build another portfolio of beaten-down companies that have decent prospects -- but protection against big downside thanks to their large cash positions.
Buckingham is even more psyched about the theme than last time around. One reason: Hes cut out cash-rich companies with losses because losses seemed to be a hallmark of underperforming cash-is-king names the last time.
Tech-heavy short list
Not surprisingly, given the blood bath in tech stocks lately, a lot of tech names appear on his list. Another common theme: Wall Street analysts hate most of his picks. But as a value investor, thats just what Buckingham wants. One of the reasons we like technology is that people have a love-hate relationship with it, says Buckingham. They hate it now, but they will love it again at some point. So buy now.
Just be prepared to hold on for two years to see your profits. And remember you may see more downside in the near term, before you ultimately reap your gains. Be sure to get a diversified group, too. Dont buy just one or two of these.
Now heres a closer look at our new cash-is-king portfolio.
The semiconductor debate
Is the semi cycle over? Thats a big debate in the tech sector these days, and frankly, its not clear if anyone has the answer. The top execs at many of Buckinghams cash-king stocks admit flat out they dont have a clue. Honestly we really dont know, says John Allen, the finance chief at Cohu (COHU, news, msgs), which sells robotic equipment that handles chips during a testing phase of production. Our hard visibility is really only about three months out, and this is always the case.
We really dont know, either, says Robert Halliday the chief financial officer at Varian Semiconductor Equipment Associates (VSEA, news, msgs). Our visibility is three months because our customers are so volatile in their demand requirements.
But several tech-company execs and analysts remain steadfastly bullish, despite the troubling slowdown in demand in June and July. I wish I had a perfect crystal ball. But my opinion is business will be coming back in a month or two, and this is not an extended slowdown that will last a year or two, says Gregory Lang, chief executive of Integrated Device Technology (IDTI, news, msgs), which makes communications chips.
Our sales professionals advise us that the slowdown will probably last until mid-August. And they believe, for the rest of the year, it will pick up, says Gary Fischer, the finance chief at Integrated Silicon Solution (ISSI, news, msgs), which makes basic memory chips used in consumer electronics devices.
I would concur; this is the pause that refreshes, agrees Peter Conrad, a tech analyst at Kopp Investment Advisors. We had a situation where lead times were stretching out so customers were ordering ahead of their needs, he says. Then, we hit the summer months, which usually have a little softness. But I dont think it is long lasting, because I think the economy is still pretty good.
Semiconductor plays
But will it be good enough? Marc Klee, a co-portfolio manager at the John Hancock Technology Fund (JHTIX), worries that economic growth from here on may continue at a muted pace. And that might not be enough to draw investors back into highly cyclical tech names like semiconductor stocks. They will always be thinking we are just three months away from the end.
To Buckingham, the whole debate doesnt matter, in part because it is impossible to figure out. When semiconductor stocks look cheap, that is when you buy them. And to me, they look cheap. If you hold them for the next two years, you will be happy, even if over the next two months you may be unhappy, he says.
Thats why hes been stocking up on these five semiconductor sector names, among others.- Cohu is mainly a chip equipment company, but it is also a homeland defense play of sorts, as it has a small division that sells video surveillance equipment. Trading at around $19.40, Cohu goes for about two times book value of $9 per share, and its within striking distance of Buckinghams buy limit of $18.90.
- Integrated Silicon Solution specializes in designing random access memory chips smaller than 256 megabits. This is the low end of the market. But the company makes more sophisticated chips than others in this niche by using cutting-edge technology that takes advantage of smaller lithography lines, those metal strips you see on chips. Its chips are used in consumer electronics, set-top boxes, network cards and cars. ISSI has $4.20 a share in cash. But holdings in Semiconductor Manufacturing International (SMI, news, msgs) and other investments bring the total cash level up to $7, or just below a recent share price of $7.50. The company has a book value of $8.
- Integrated Device Technology makes chips used in networks that carry Internet traffic. The chips look inside packets of information to help direct traffic. Its chips also are used in wireless system base stations and in storage systems. It doesnt make chips used in consumer electronics. A lot of companies like ours are trading at trough levels even though business has been improving and there is good headroom to grow, says IDT chief executive Lang. The company has a book value of $6.48 and $5.59 a share in cash -- not bad for a stock that trades for around $10.40.
- Varian Semiconductor Equipment makes ion implanters used in chip production. We make a giant spray-paint gun that takes a charged element like boron and puts it in silicon, says finance chief Halliday. The process embeds chips with paths and barriers that direct signals along the chips. Virtually all of the major chip producers use Varian equipment. Varian has a book value of $14.84, and, at $29, the stock trades well below Buckinghams buy limit of $39.
- ESS Technology (ESST, news, msgs) designs and sells digital video processor and imaging chips used in digital entertainment products like DVD players, digital audio systems and camcorders. The stock recently traded at $6.80, well below Buckinghams buy limit of $9.40. It has $3.25 per share in cash and a book value of $4.59.
Two former high fliers from the bubble days
Anyone who traded tech stocks during the bubble surely remembers high-flying QLogic (QLGC, news, msgs) and Applied Micro Circuits (AMCC, news, msgs). Now theyve fallen so low, theyre value plays. But they have enough cash to protect against being vaporized if the economy falters. - QLogic gets the lions share of its revenue by selling components used in fiber-channel storage area networks (SAN). Fear of slower growth in this area has investors running for the exits. But Chief Executive Harshad Desai thinks demand for SANs will soon increase among small and medium companies, picking up any slack. We expect to see traction in the fourth quarter, he told me last week. At a recent price of $22.70, QLogic trades below Buckinghams buy limit of $24. The company has about $7.84 per share in cash and a book value of $9.09.
- Applied Micro Circuits once wowed investors with brisk sales of components used in long-haul Internet networks. That business collapsed, and now its building a future in storage components, thanks to three acquisitions. Since last September, Applied Micro bought a chip division of IBM (IBM, news, msgs) called PowerPC, as well as component makers 3Ware and JNI Corp. In its core communications-chip business, the company is refocusing on networks around cities and access devices, moving away from long haul. Theyve had some good design wins, but it has not translated into meaningful revenue yet, says Conrad, of Kopp Investment Advisors. The company has $1.50 a share in cash, and Buckingham thinks its a buy below $4.18.
Three high-yield plays
Buckingham also owns three cash-is-king companies that pay decent annual dividend yields of 3% to 5%. With these three, you are getting paid to wait for the market to come to its senses, says Buckingham. - Ambassadors International (AMIE, news, msgs) is a hospitality company with a nascent reinsurance division. It goes for about $12 per share, but it has cash of $9.72 per share and a book value of $10.
- American Software (AMSWA, news, msgs) sells supply-chain software to well-known clients such as Columbia Sportswear (COLM, news, msgs), Pfizer (PFE, news, msgs) and ConAgra Foods (CAG, news, msgs). Shares in the company recently went for $5. It has a book value of $3.09 and $2.82 in cash. But that goes up to $4 if you include the companys 86% stake in Logility (LGTY, news, msgs).
- Traffix (TRFX, news, msgs) is an online marketing company that uses promotions to attract people to dozens of Web sites, where it collects personal information to be used in marketing campaigns. The company also has an online dating site, a dial-up Internet access service, and a computer help-desk service that home users buy for a monthly fee. Traffix has a book value of about $3.15 per share and cash levels of $3 per share.
iPass: Buckinghams dud
As a value investor fishing among troubled companies, Buckingham is bound to choose some duds. My pick for the loser among his cash-is-king stocks: a company called iPass (IPAS, news, msgs), which helps other companies provide remote, dial-up access for their employees. While iPass has $2.64 per share in cash and trades near $5 (down 78% since the companys shares began to trade publicly), it also has three strikes against it, in my book. - First, iPass blew a cost-saving measure last quarter when it tried to shut down several access points to save money -- but alienated customers instead. Thats OK, mistakes happen. But the company then blamed its earnings miss in part on the Internet equivalent of the weather, or an Internet virus known as Sasser. User growth actually turned out to be the slowest in the companys history for the quarter, raising doubts about this excuse. We remain somewhat unconvinced of this explanation, wrote Friedman Billings Ramsey analyst Nitsan Hargil in a July 28 note.
- Next, an iPass rep failed to clarify for me what the company offers that sets it apart from much stronger competitors such as AT&T (T, news, msgs) and MCI (MCIP, news, msgs).
- When asked to explain, finance chief Bryan Parker balked. Instead, he questioned my credentials merely because I work for MSN Money from a remote location. For a company in the business of providing employees with remote access, thats a deliciously ironic way to dodge a question. But its more the caginess that bothers me. As a rule, when a companys business is in decline and it stonewalls, its a bad sign. Regardless of how much cash it has, I say take a pass on iPass.
| The 2004 cash-is-king stocks | | Company | Recent price | Buy below* | Cash per share | % cash per share | Annual dividend | Dividend yield | | Semiconductor-related | | | | | | | | Cohu (COHU, news, msgs) | $20.25 | $18.90 | $5.40 | 27% | $0.20 | 0.99% | | ESS Technology (ESST, news, msgs) | $6.90 | $9.40 | $3.25 | 47% | $0.00 | N.A. | | Integrated Device Technology (IDTI, news, msgs) | $10.80 | $15.40 | $5.59 | 52% | $0.00 | N.A. | | Integrated Silicon Solution (ISSI, news, msgs) | $7.80 | $11.00 | $4.20 | 54% | $0.00 | N.A. | | Varian Semiconductor (VSEA, news, msgs) | $28.75 | $39.00 | $10.85 | 38% | $0.00 | N.A. | | Bubble days tech stars | | | | | | | | Applied Micro Circuits (AMCC, news, msgs) | $3.35 | $4.18 | $1.50 | 45% | $0.00 | $0.00 | | Qlogic (QLGC, news, msgs) | $22.90 | $24.00 | $7.84 | 34% | $0.00 | $0.00 | | Three high-yield plays | | | | | | | | Ambassadors International (AMIE, news, msgs) | $12.05 | $12.40 | $9.72 | 81% | $0.40 | 3.32% | | American Software (AMSWA, news, msgs) | $5.60 | $5.60 | $2.82 | 50% | $0.28 | 5.00% | | Traffix (TRFX, news, msgs) | $6.15 | $6.50 | $3.02 | 49% | $0.32 | 5.20% |
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*Investors should buy the stock below this price. Source: John Buckingham, portfolio manager of the Al Frank fund.
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