Discussion in 'Stocks' started by turkeyneck, Feb 27, 2010.
Like AAPL sitting on $40b cash or cash equivalent. Is this good or bad?
1) It's bad. The company doesn't want to invest cash because they believe there isn't any "value" at current levels.
2) Companies tend to do deals when prices are high, not low, another bad thing. They end up chasing the market.
3) The company may be terrified of becoming illiquid and wants to maintain the large cash cushion, another bad thing.
I did some research on this once. I sorted practically all stocks by cash as a % of assets every year for about 20 years. A portfolio of the highest 10% outperformed the bottom 10% by around 40 bps per month.
I think what nazzdack said is true and might be the most important factors for some companies, but there are other benefits of cash good that seem to be more important on average.
At first I was taken in by the quick synopsis of your study, but very soon I saw the holes.
You've incorporated a natural scew (sp?) re: strong companies vs. weak companies. Weak companies rarely have the luxury/opportunity to carry large cash balances, whereas strong companies often do. Thus what your study told us was that strong companies generally outperform weaker ones.
Better if you could hold results constant for such factors as operating margin, cyclicality of business, etc.
In a nutshell, I don't think your study told us anything intelligible. Whether high cash balances makes sense really depends on the type of business, and how adept management is at allocating capital. For example, many investors trust Buffett to sit on a pile of 'rainy day' cash. The same couldn't be said for many, perhaps most, other companies.
The answer to whether it is good for management to sit on a load of cash is that 'it depends.' That is where solid funamental analysis must brought to bear on a case by case basis.
Hmm, holding a lot of cash at the peak of a bull market is good. Holding a ton of cash amidst a bear market is bad. They need to invest and earn some good returns so they can liquidate there cash later when things get to expensive.
You'll find that most managers know how to run there business but they suck as hell at investing corporate money.
Did you test for the volatility and max drawdown of this outperformance?
Fair points, and there's more that you left out. A company's cash holdings are a function of its cash generating power, its financing policy, and its investment needs/larks. To do a really good job you should consider all these things.
But I didn't go into detail in my first post. I did some of this and still found companies holding cash outperformed by about the same amount as in the raw version. In one model I put the cash ranking in a regression with 11 other variables. Some of the other variables were book-to-market and lagged returns at different horizons (somewhat controlling for your strong vs. weak issue), asset growth, and net issuance/buyback activity over the last 1 and 3 years. You could probably come up with a better set of controls if you wanted to spend the time, but this is as far as I went.
I looked for the results today, I only found a spreadsheet for a 1990-2007 subperiod. For the raw long high cash - short low cash version, it was 51 bps/month, t-stat of 3.8. After controlling for other stuff, 44 bps/month, t-stat of 2.7.
Overall I think you are right that there is not a one-size fits all answer, but that doesn't mean there aren't general tendencies you can see in historical data.
I did but don't have everything saved. From what I remember it looked like it was not impressive as a stand-alone strategy but helped alot in a multi-factor monthly return model.
I did find a spreadsheet that has the monthly volatilities of a payoff to the cash factor - 196 bps on the raw factor and 241 bps in a regression with the stuff I mentioned in the other post. I don't have the extremes but I do remember it being pretty fat-tailed. Without getting too long-winded, these are from regression coefficients that are in theory investable portfolios that are useful for analysis but aren't really practical to implement. But the results were pretty close to what I got with simple long-short portfolios based on extreme rankings.
At some point I will probably update the data and re-run the model, I am curious to see if the high cash companies crushed it during the crash and recovery. I'll try to post again then.
Shouldn't Govt impose 'tax' on such companies?
Companies sitting on cash, ...thats what they do. They will put it to work on Capital Equipment, R&D, expansion of Hard Assets..
Thats what they do...they could be sitting on cash to hedge higher energy cost coming down the pike....a lot safer than playing the Oil Futures market, which is outside their normal business plan.
APPL is doing what most companies are right now.....and smart money....sitting on Cash, regardless of the Weaker dollar, as in weaker from 4 years ago..
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