It’s a tough market for UK investors at the moment, especially in small caps. Even companies with a stable outlook and strong balance sheets are seeing their shares sold off.
For investors, the discomfort is real. But history suggests that this difficult period won't last forever and is very likely to create opportunities for forward-looking investors.
Earlier this year, Mark took a look at the idea of investing in net nets – stocks trading below the value of their liquid assets.
I’m not pursuing such an extreme approach to value. Instead, one of the main strategies I’m using in this environment is looking for good companies with plenty of cash that are not being rewarded for their prudent balance sheets.
I see this as a sleep-at-night strategy. It combines two key attractions which I believe are likely to support market-beating returns over time:
Enough cash to provide a margin of safety and protect against most conceivable problems
A reasonably valued underlying business, with the potential to drive a share price re-rating when market conditions improve
Companies offering this combination of qualities aren’t always readily available, but I think that there are some opportunities of this kind in today’s market.
To help me find these opportunities, I’ve built a new screen targeting cash-rich companies.
My cash-rich companies screen
Stockopedia’s screening tools make it fairly easy to find companies that satisfy these requirements on paper. But I do need to add a word of warning.
Not all net cash is surplus cash. I’ll highlight some examples of this below.
In addition, some companies’ cash positions can disappear very quickly in certain situations.
For these reasons, it’s important to have some understanding of the businesses involved and their current circumstances. These screening results are a starting point for further research, not a list of shares to buy.
With that caveat in mind, here are the rules I’ve created for this new screen. I’ve tried to keep things as simple as possible, in order to avoid being too restrictive or biased.
Price to Net Cash (latest) - this is a useful value screening ratio that allows us to compare a company’s market cap with its net cash position.
For this screen, I’ve chosen to…
