Trading Beneath Cash: A Good Investment Gamble?

Today a subscriber asked me to look at a certain company that seemed like an attractive investment due to the fact that the market value of the company, as evidenced by the stock price, was beneath the company's cash on the balance sheet. I took a look at the company in question, and when I saw that they had no attractive operating business at the current time which could potentially provide future free cash-flow growth to shareholders, I quickly passed on the opportunity and did not even consider buying the stock (though I am watching to see what management plans to do with their cash).

In general, I have found that cash-rich companies with no viable operating businesses are horrendous investment gambles. I've lost plenty of money over the years, watching my investment in such companies decline, as the cash dwindled, management took huge salaries, paid high-priced consultants, all in the hope of finding a new operating business to invest in.   

In any case, the point of investing in a stock is to participate in the growth of a business via the future free cash-flow growth of the company that the stock represents. If a company's only asset is their cash, and you have no idea what type of business, if any, the cash will go to fund, I see no reason to invest in such a company. 

There is in fact a far better business to invest in if you want to invest in a cash-rich business with no growth prospects. That business is the US Government. At least when you gamble in US Government securities you are gauranteed interest and you know the Government will never run out of cash since they can and always do print more cash via various means. So when given a choice of investing in a cash-rich stock with no existing viable business vs. investing in a Treasury, I'll take the Treasury any day.

With that said, cash-rich businesses with viable, well-articulated, and proven growth opportunities are always very interesting investment gambles, assuming that the valuation makes sense. I've mentioned several on this blog already in my stock pick sections. The bottom-line is that cash alone does not do an investor any good. You need cash, a viable and proven growth/business opportunity, and an experienced management team who are incentivized to increase the stock price.

Comments

[nodoodahs]

They'll probably just wast their cash on a stock buyback. HAH!