Cash is King

Earlier this year, I read a news story about how Bernanke and Greenspan were both saying that many companies had lots of cash on the books. They also said that businesses were in better shape now than they were during the last two economic contractions.

The article was quick to point out that they were excluding Financial Companies. But they also made it a point to say that many companies across the rest of the industries (from Cisco (CSCO) to Coca-Cola Co. (KO) to use their example) have 'socked away' cash, reduced their debt and cut inventories.

Granted, a lot has changed since the beginning of the year - but we got a chance to see just how much money some companies have on hand this week when Microsoft (MSFT) announced a $40 billion stock buy-back plan. Nike (NKE) followed suit and announced a $5 billion repurchase program. And then Hewlett-Packard (HPQ) did the same with their own $8 billion dollar buy-back program. (This is HPQs third buy-back program in two years.)

So all that being said, I decided to put together a screen that looks for companies with solid cash positions.

Let me note that I'm not doing this in hopes that these companies initiate repurchase programs of their own, even though that could be a benefit. I'm doing this because, as the credit market tightens, the companies with the strongest cash positions, coupled with low debt, reduced inventories and the like, will be in the best position to weather a financial crisis.

And today's eye-popping numbers made me think that in spite of all the turmoil we've seen in the stock market, some companies should do just fine due to their healthy balance sheets.

So here we go:

I first looked for companies with Cash and Marketable Securities that are higher now than they were last year at this time. Having a strong Cash position means companies will not have to depend on banks to finance their operations, especially in this tight credit market. I also want the Debt to Total Capital to be less than the 5 Year Average Debt to Total Capital. Companies able to reduce their debt positions from their historical ratios is a sign of strength and a healthy balance sheet. I want the Cash Flow to be greater than the Cash Flow from Last year. This too is a sign of financial health. I also want to see Inventories below last year's levels. Turnover of inventory (raw materials, unfinished goods and finished goods) is a primary way a company makes money. High levels of inventory for long periods of time is usually not good sign. I also want the stocks to show Annual EPS Growth Rates that are greater than the Median for their respective Industries. This lets us focus on the top half of the companies in their peer group. Lastly, I want Next Year's EPS Growth Rate to be better than last year. Companies expecting growth in this current economy are the ones to favor.

And all of the above criteria are applied to stocks trading at or above $5 and have an average daily trade volume of at least 50,000 shares or more.

Here are a few stocks from that list for Tuesday, 9/23/08:

AYI Acuity Brands, Inc.

DMND Diamond Foods, Inc.

DV DeVry, Inc.

LVB Steinway Musical Instruments, Inc.

SEAC SeaChange International, Inc.

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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

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