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Bargain Buys For Patient Investors - Barron's

by: SA Editor Rachael Granby October 12, 2008 | about stocks: AAPL / BRCM / CAT / CMI / DE / DELL / EBAY / ERTS / HON / IACI / INTC / ITW / KBR / L / MOT / MSFT / NOVL / NTE / NVDA / PCAR / RNWK / TEX / UTX / XOM / YHOO    
Rachael Granby

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Rachael Granby

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The credit crisis has shifted emphasis back to the importance of a strong balance sheet, something many investors willfully forgot about during the bull market through 2007. Those same investors, who once urged CEOs to take on debt to buy back stock, are now focused on upcoming debt maturities and refinancing fears. With the markets taking a bruising and most major stocks now valued at less than 10 times estimated 2008 earnings, this could be a historical opportunity to buy stocks at bargain-basement prices and wait for a recovery. Barron's Andrew Bary highlights twenty-five cash-rich companies that patient investors can pick up on sale.

Exxon Mobil (XOM) leads the cash race with $30B, Corporate America's largest cash hoard. At $62, it trades at just seven times projected 2008 earnings market value. The firm may shift some of its cash from a stock buyback program to an acquisition, as some independent energy firms face debt refinancing troubles.

Smaller companies may have less cash on hand in real terms, but their holdings make up a greater percentage of their market values. IAC/InterActiveCorp (IACI) and KBR (KBR), for example, both have cash holdings that account for over half their market values.

Once criticized as overly conservative for holding too much cash, several tech leaders are now seeing those cash holdings pay off. Apple (AAPL) and Dell (DELL) have cash equal to over 25% of their market values. Motorola (MOT) and Electronic Arts (ERTS) have cash positions worth 30% of their market values. Yahoo (YHOO) has around $2/share in cash and another $3/share in investments.

Microsoft (MSFT) has a strong balance sheet with $23B in cash and another $6B of equity investments. It also has a monopoly software business and a P/E of just over 10, the lowest in its history. Microsoft may miss its FY 2009 earnings target, but trading at $21.50, one could argue that a miss is already reflected in the stock price.

Industrial stocks have been hurt lately as investors worry about domestic recession and a drop in global demand, leading to P/E ratios at their lowest levels in years. Caterpillar (CAT) trades at just seven times 2008 estimated earnings, United Technologies (UTX) trades at less than ten times earnings, and Deere (DE) at eight times earnings. Citigroup analyst David Raso set a price target of $65 for Deere (currently at $38) and $72 for Caterpillar (currently at $43).

Jim Paulsen, of Wells Capital Management, succinctly said "assets are being given away." He added, "they may not do well in the next several months, but looking ahead two or three years, investors may see some of the best opportunities of their lives."

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This article has 17 comments:

  •  
    Oct 12 05:16 AM
    Other than tech stocks, anything else worth looking at ?
    Don't have much left after all these stormy days, you know.
    Reply
  •  
    Oct 12 08:14 AM
    Well done article. Nicely researched and sensible.
    Reply
  •  
    Oct 12 09:17 AM
    What about solid utilities yielding 6 and 7 percent? Any thoughts?
    Reply
  •  
    Oct 12 12:23 PM
    a little more research would have offered the amount of debt that these companies have in relation to their cash position. that makes a ton of difference.

    i only follow one company on your list and their debt is zero.
    Reply
  •  
    Oct 12 12:44 PM
    I am concerned about the safety of financial preferred stock, particularly Royal bank of scotland and would like some suggestions
    Reply
  •  
    Oct 13 12:59 AM
    would'nt you rather have solid companys with tangible assets rather than holding fiat dollars with nothing but faith backing them up? mlp cni up wr eix sre cvx cp and on and on!
    Reply
  •  
    Oct 13 12:59 AM
    Apple not only has 22 Billion in cash but no debt. They are much better off than Dell, whom you equated them with.

    Microsoft, while having 23 billion to Apple's 22 billion in cash, has way too many troubles to list here, and it's low P/E has little to do with the current financial climate but to their many other difficulties.

    Let me list a few of these difficulties. First, they are losing market share in operating systems--very few people want 'Vista' and most who have tried it seem to have had problems with the 'upgrade', losing browser share with a non-internet standards compatible browser, a completely failed internet search division, a non-competitive Zune music player, no online sales strategy for media or software, no online applications software, and a game system selling at deep discount (and financial loss) which has been upstaged by Nintendo Wii.
    Reply
  •  
    Oct 14 09:39 AM
    Take a look at NRG, GE and CEG. I loaded up on GE when it dipped in the teens. I'm doing the same for NRG now that it dipped into the teens and picked up some CEG when it went down to the low 20's. Long on all these stocks.

    As for tech, I like Rimm. Wait for the next dip, it will come.

    lanaslines.com
    Reply
  •  
    Oct 14 12:29 PM
    I picked up some UTX and INTC last week. MSFT is still a little overpriced based on my current valuation.

    Best Wishes,
    D4L
    Reply
  •  
    Oct 14 01:15 PM
    Oil guru Richard Rainwater recently bought back shares of Exxon (NYSE:XOM), ConocoPhillips (NYSE:COP), Pioneer Natural Resources (NYSE:PXD), BP (NYSE:BP) and Statoil (NYSE:STO) — all at rock-bottom prices.

    Now is the time to buy oil. The third quarter of 2008 saw the largest drop in oil prices in 17 years.

    Now with OPEC slashing its production outlook for the rest of 2008 and 2009, it’s unclear just how long prices will be able to stay under $100.
    Reply
  •  
    Oct 14 02:50 PM
    Brewer,

    I agree 100% about MSFT. What can I say, the company consitently makes inferior products. That buggy, insecure resource-hog Windows is going the way of the typewriter, XBox = FAIL, and there is no strategy for them to change with the times. GOOG, APPL, and open source are going to clean their clocks in the next couple years, and today's prices won't look cheap at all.

    AOL was in the same boat in the late 90's. Run, don't walk, away.
    Reply
  •  
    Oct 14 08:28 PM
    Andrew Barry is a senior editor (not analyst) at Barron's and has been writing articles like "top 10 list of the most attractively priced stocks around the globe" or articles as quoted above based on one or two random criteria.

    To the best of our knowledge, Andrew Barry does not claim to have done any in depth analysis, nor is he claiming that he has consulted with analysts prior to writing these articles.

    The purpose of these type of articles is just to highlight that certain companies are sitting on a ton of cash or are trading at historically low P/E's. It doesn't tell you what the cash is for or why the P/E is so low, yet suggests that there may be a buying opportunity.

    Do your own DD, nothing more. Most importantly, just because the name 'Barron's' appears on the article, doesn't make it any better or worse than any other article appearing on Seeking Alpha.

    CrossProfit
    Reply
  •  
    Oct 15 04:29 AM
    Don't touch GE. It is a horribly run company because of that pig Immelt. It isn't even worth the yield. You can find higher yield elsewhere anyways!!!
    Reply
  •  
    Oct 15 07:01 AM
    Agree, GE products are not as good as the old days. Quality control is lacking. Not like those Good Old "Made in USA."
    Reply
  •  
    Oct 15 12:30 PM
    GM is the only one where I am ahead. I credit the UAW.
    Reply
  •  
    Oct 15 12:34 PM
    Yes, the UAW supports GM. They know on which side their bread is buttered.
    Reply
  •  
    Oct 15 05:15 PM
    SmartStops:

    Sometimes the smartest exit strategy is not to enter at all... Stop. Wait.

    Beware the talking heads who are telling you to buy, buy, buy. You'll be buying into the BS bubble.
    Reply
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