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Stocks  | June 22, 2020

I searched the words “cash-rich stocks” and came up with almost 7,500 results.

Everybody is looking for companies that have lots of cash, little debt, high free cash flow generation and solid margins. That’s especially true when the economy is teetering on the brink of disaster. 

The problem is that everyone’s definition of what makes a company cash-rich is different. And then, there’s also the problem of comparing one industry to another. Some industries are notoriously cash-intensive, while others can be run on pennies. 

I’m exaggerating, of course. The point is, you say TOW-MATE-O, and I say TO-MAT-O. We’re not going to have the same definition. 

For me, the companies that are cash-rich are those that convert as much free cash flow as possible from net income and have more cash than total debt on their balance sheet. Margins, while important, aren’t as critical as the ability to generate cash. End of story. 

  • Facebook (NASDAQ:FB)
  • Electronic Arts (NASDAQ:EA)
  • Alibaba (NYSE:BABA)
  • Monster Beverage (NASDAQ:MNST)
  • Texas Pacific Land Trust (NYSE:TPL)
  • SEI Investments (NASDAQ:SEIC)
  • Intuitive Surgical (NASDAQ:ISRG)
  • Veeva Systems (NYSE:VEEV)
  • Universal Display (NASDAQ:OLED)

To create some diversification on my list, I’ve tried to select companies from several different sectors and not just technology. 

Happy investing.  

Cash Stocks to Buy: Facebook (FB)

Free Cash Flow to Net Income: 110.6%

Cash and Marketable Securities to Total Debt: 583.1%

Say what you will about Facebook, but it’s a cash-flow machine. So fantastic is the company’s pile of cash that CNBC wondered last December if it could be taken private due to its $52 billion cash pile. 

CFRA analyst John Freeman wondered at the time whether it didn’t make sense to go private and avoid all the scrutiny that goes with being a public company. 

“It would be the biggest deal ever, but why not go private?” Freeman said at the time. 

Well, that cash pile is now more than $60 billion. At a time when interest rates will remain low for the foreseeable future, a management buyout by Mark Zuckerberg wouldn’t be impossible by any means. 

Alphabet (GOOG, GOOGL)    

Free Cash Flow to Net Income: 84.2%

Cash and Marketable Securities to Total Debt: 697.8%

It’s only fitting that the other major player in the digital advertising game is also on my list. While it doesn’t convert as much net income to free cash flow, Alphabet still has a rock-solid balance sheet to withstand anything the novel coronavirus throws at it or the economy in general. 

InvestorPlace’s Josh Enomoto, recently selected Alphabet as one of 10 gaming stocks to buy to survive and thrive during the new normal. To be honest, when I think of Alphabet, I don’t think of it as a gaming stock. But Josh points out that its Stadia video game streaming platform makes it so. 

Sometimes, it’s easy to forget that Alphabet is more than just advertising. However, it’s equally important to remember that without Google Search and its advertising cash flow generation, it wouldn’t be able to operate all the other bets it has, including Stadia. 

It’s a nice problem to have.

Electronic Arts (EA) 

Free Cash Flow to Net Income: 54.6%

Cash and Marketable Securities to Total Debt: 536.4%

Speaking of video games, Electronic Arts is one of the biggest and best developers of gaming content. Enomoto also had EA on his list of gaming stocks. He believes that its exclusive NFL partnership on the Madden franchise makes it the “King Kong” of video gaming. 

Electronic Arts recently extended its partnership with the NFL to May 2026, giving it a license to print money for another six years. While others can make non-simulation games for the NFL, EA is the only game in town for simulated games. And that’s music to the ears of shareholders, I’m sure.

As if things couldn’t get any better for Electronic Arts, the company said on June 15 that it’s got a new Star Wars title coming out in the fall. The move pushed EA stock to a two-year high.

In January, I stated that EA looked ready to deliver for shareholders in 2020. Despite Covid-19, I think it has rewarded their patience. I expect more gains in the second half of this year. 

Alibaba (BABA)

Free Cash Flow to Net Income: 85.7%

Cash and Marketable Securities to Total Debt: 291.9%

Forbes contributor Warren Shoulberg writes about retail. He recently suggested that Amazon’s (NASDAQ:AMZN) biggest threat isn’t Walmart (NYSE:WMT), but rather Alibaba.

I like the way Shoulberg calls Alibaba the Amazon, Facebook, Instagram and Twitter (NYSE:TWTR) of China. It definitely emphasizes why Amazon shareholders better hope to god Alibaba doesn’t figure out the U.S. market. If it does, Jeff Bezos’ stranglehold on the title of the world’s wealthiest person will likely go up in flames. 

Shoulberg points out that here in North America, Alibaba is going after the business-to-business market, where it feels Amazon is most vulnerable. 

“In early June, Alibaba introduced a series of services for small- and medium-sized businesses, including dozens of virtual trade shows where merchandise can be viewed and ordered in the absence of in-person events canceled due to Covid-19,” Shoulberg stated June 15. 

Many years ago, after returning from an exhausting trade show, I wondered why I couldn’t just meet with companies virtually. Now, it appears Alibaba wants to ensure that you can.

Look out, Seattle.

Monster Beverage (MNST)

Free Cash Flow to Net Income: 93.8%

Cash and Marketable Securities to Total Debt: 3,133.3%

The maker of energy drinks is having a decent year in the markets. It’s got a year-to-date total return of 9.7%. But when you consider its long-term average — 11.4% and 9.5% annualized over the past three and five years — it’s not doing too badly. 

Furthermore, all of its major peers — Coca-Cola (NYSE:KO), PepsiCo (NASDAQ:PEP), and Keurig Dr. Pepper (NYSE:KDP) — are in negative territory for the year. 

Sure, the major growth phase of Monster’s history is over, but there’s still plenty of business to be had on a global basis. The energy drink market generated $53 billion in global sales in 2018. Estimates put the industry’s annual growth at 7% per year through 2026. 

The only awkward part of owning MNST stock is this. Coke owns almost 20% of its stock, distributes Monster’s products and has launched its own line of energy drinks. 

If you can get over that trifecta, it’s a solid long-term buy.

Texas Pacific Land Trust (TPL)

Free Cash Flow to Net Income: 104.9%

Cash and Marketable Securities to Total Debt: 6,884.3%

Of all the cash stocks that made my list, Texas Pacific Land Trust is the one I’m least familiar with, which isn’t surprising given I’m not very bullish on the oil and gas industry. 

Texas Pacific Land Trust is one of the largest landowners in Texas. It currently owns more than 900,000 acres in the western part of the state. TPL operates two segments: Land and Resource Management, which makes money from oil and gas royalties, commercial leases and land sales. The Water Services and Operations segment provides water services to operators in the Permian Basin.   

In the first quarter of 2020, the land and resource management segment generated 59% of its $96.6 million in revenue. In the same quarter a year earlier, the segment generated 84% of $191.3 million in revenue. The previous year’s numbers were much higher due to over $103 million in land sales that quarter. 

In the middle of reorganizing into a corporation from a trust, it’s expected to be completed by the end of the third quarter.

If you believe in oil and gas, TPL appears to be a much safer way to make a bet on the industry.  

SEI Investments (SEIC)

Free Cash Flow to Net Income: 100%

Cash and Marketable Securities to Total Debt: 1,560%

If you’ve owned shares in SEI for a long time, you’re likely disappointed with the financial services company’s performance. It’s got a five-year total return of 3.9%, about 60% less than the U.S. markets as a whole over the same period. 

Probably best known for the back-office services it provides for investment firms on Wall Street and beyond, it also manages money, putting it at times in conflict with some of its customers. Despite the slightly awkward relationship, it’s built a business that administers $632 billion in assets and manages another $283 billion. 

Based on an enterprise value of $7.7 billion, SEIC has an FCF yield of 6.5%. I consider anything above 8% to be in value territory. It’s not a flashy stock, but it has excellent margins, a strong balance sheet and a fantastic return on invested capital. 

Eventually, SEIC stock will come to life. 

Intuitive Surgical (ISRG)

Free Cash Flow to Net Income: 86.3%

Cash and Marketable Securities to Total Debt: N/A

If you’re looking for a company with a fortress-like balance sheet, Intuitive Surgical would have to be it. The maker of da Vinci robotic surgical systems finished the first quarter of 2020 with no debt and $3.2 billion in cash and marketable securities. 

I have been a fan of the company for years. I first recommended it on InvestorPlace in March 2013. Most recently, I called ISRG an innovative stock to buy in the “new normal.” 

One look at its long-term performance and you can’t help but think the good times have passed you by — it’s got 5- and 10-year annualized total returns of 28.6% and 17.8%, respectively. But the truth is, the company’s robotic systems continue to make inroads into every nook and cranny on this planet. 

Intuitive Surgical continues to grow its revenues by double digits each quarter. I don’t see that changing anytime soon. 

Veeva Systems (VEEV)

Free Cash Flow to Net Income: 154.8%

Cash and Marketable Securities to Total Debt: 2,760%

Veeva Las Vegas. Oops. Wrong Veeva. I’m talking about Veeva Systems, a provider of cloud-based software to the global life sciences industry. 

I was trying to remember if I had ever recommended Veeva before. It turns out that I called it a growth stock to buy in August 2018. Here’s what I had to say about it.

“The thing I like about Veeva is that it’s not growing at an alarming rate — in Q1 2019, revenues rose by 22% to $196 million with subscription revenues accounting for 80% of its quarterly sales,” I wrote at the time. “Meanwhile, it also generates healthy profits — non-GAAP net income in Q1 2019 was $51.4 million, 50% higher than last year and 22.5% of revenue — which bodes well for the long-term sustainability and growth of its business.”

Flash forward to today. Revenue growth has accelerated — up 38% year over year in its latest quarter. And it makes money on a GAAP basis. Even better, its net margin was 25.7%, 320 basis points higher than two years earlier.

Not surprisingly, VEEV stock is up 124% since my 2018 recommendation. As long as it continues to convert more than 100% of its net income to free cash, I don’t see why you wouldn’t want to own it.   

Universal Display (OLED)

Free Cash Flow to Net Income: 100%

Cash and Marketable Securities to Total Debt: N/A

Universal Display is one of only two companies on this list without any debt. It finished the end of March with $640 million in cash on its balance sheet. As the company stated in its Q1 2020 press release, “We plan to continue to invest in our leadership position in the OLED ecosystem.”  

Universal Display owns more than 5,000 patents related to organic light-emitting diode (OLED) technology. Television and smartphone makers come to it to license the technology for their products. It also sells the organic materials required for the OLED products its customers manufacture. 

In the first quarter, it had revenues of $112.3 million, 27.9% higher than a year earlier. On the bottom line, it had a net income of $38.2 million, 21.3% higher than in Q1 2019. Both its materials sales and royalty-and-license fees saw healthy increases during the quarter. 

Like most businesses, Covid-19 will affect it in the short term, but in the long term, the potential for OLED technology is excellent. 

A revolutionary initiative is helping average Americans find quick and lasting stock market success.

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