After blockbuster gains in 2013, investors are searching for ways to replicate their big gains in the new year. Maybe they should be paying more attention to unloved stocks like General Motors, American Airlines, TiVo, JC Penney, and Bunge. The metrics may be in their favor.
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That’s what Instinet analysts Joe Mezrich and Junbo Feng argue in their new report, “The Cash Advantage.” Mezrich and Feng make the case that stocks like GM, JC Penney and others are undervalued in the current marketplace because investors aren’t paying enough attention to the cash those companies have on hand. They say that the Cash to Market Cap ratio is a metric that can be indicative of future success.
“The large cash holdings of companies today are often thought of as a defensive reaction to the financial crisis, but abundant cash has been evident for many years,” they write. “Before 1999 companies grew cash at about the same pace as earnings; since then they have continued to grow cash steadily while earnings have lagged.”
The report continues: “Returns to the Cash/MktCap factor have been quite attractive over both the long and short term. YTD in 2013, the Cash/MktCap factor has returned an annualized 16.7% in the Russell 1000 when financials are excluded and 22.4% when financials are included.” (See above chart from Instinet.)
A Forbes analysis shows many well-known companies have large cash reserves. General Motors, for example, has a 49.5% total cash and short term investments to market cap ratio. JC Penney has a 49.1% ratio. Other stocks look even more attractive. WebMD comes in at 51.4%, Kodak at 62.6%, TiVo at 67.1%, and American Airlines at 77.2%. Investors have left many of these companies behind, but perhaps it’s time to take another look.
More broadly, Mezrich and Feng think tech especially could be an area to watch: “We expect Cash/MktCap to remain a strong source of return in 2014. Moreover, based on the current sector distribution of stocks in Cash/MktCap, we would expect tech stocks to stand out as beneficiaries on the long side of Cash/MktCap, and utilities and energy stocks to stand out on the short side.”
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