Wednesday, September 10, 2014

Companies with low cash are not a good bet.

Question:   The USA Today published information on stock price changes for companies in the Standard & Poors 500 with the least and most cash



What is wrong with the U.S.A Today Analysis?

Raw Data:

Here is the raw data for this question.  

Ten Companies With Least Cash
Company
Symbol
Cash and  Investments $ Millions
Year to Date Change in Stock Price
Range Resources
RRC
$0
-11%
Denbury Resources
DNR
$12
-1.40%
Southwestern Energy
SWN
$23
-0.70%
Stericycle
SRCL
$26
1.10%
Martin Marietta
MLM
$34
31%
Ameren
AEE
$46
7.40%
Republic Services
RSG
$50
18.10%
Windstream Holdings
WIN
$55
41.50%
Tractor Supply
TSCO
$56
-18.10%
Newfield Exploration
NFX
$62
60.30%
Ten Companies With Most Cash
Company
Symbol
Cash and  Investments $ Millions
Year to Date Change in Stock Price
Apple
AAPL
$164,611
22.30%
Microsoft
MSFT
$99,538
-25%
General Electric
GE
$69,989
-7.60%
Google
GOOGL
$60,730
5.60%
Cisco Systems
CSCO
$60,730
10.80%
Pfizer
PFE
$51,777
-4.60%
Exxon Mobil
XOM
$41,193
-3.80%
Chevron
CVX
$40.16
0.20%
Oracle
ORCL
$38,842
6.40%
Coca-Cola
KO
$37.38
1.50%
Sources: S&P Capital IQ, USA TODAY


Assessment of USA Today Work on Cash and Stock Performance: 


There is at least one obvious typo in the raw data.  Microsoft is up nearly 25% year to date not down.   (It is amazing to me that this article with this typo made it through a consulting firm and the editors of USA Today and was then highlighted by the editors of CNBC.  At this time this article is the lead article on the CNBC web site.)

It is almost always deceptive to look at a single statistic – the average.   The low-cash portfolio is bimodal.  It has stocks with very low and very high returns.   The success of this portfolio in this period can be attributed to three companies  -- Newfield Windstream, and Martin Marietta.      The return for Newfield is key. 

The risk of the low-cash portfolio is high.   Readers should focus on  the standard deviation, minimum range and inter-quartile range of return of the stocks presented below.  



Stocks with Least Cash
Stocks with Most Cash
Average
12.8%
5.6%
Median
4.3%
3.6%
Standard Deviation
24.7%
11.0%
Skew
79.4%
80.1%
Minimum
-18.1%
-7.6%
Maximum
60.3%
25.0%
Range
78.4%
32.6%
Q1
-1.2%
-2.8%
Q3
27.8%
9.7%
Interquartile Range
29.0%
12.5%



I very quickly looked at the daily detailed quotes for the low-cash stocks.   All of these companies reported positive earnings in the recent quarter.  Interestingly, seven of the ten low cash companies pay some dividend. 


In perfect capital market theory dividends are not relevant for stock performance.    However, capital markets are not perfect and the empirical literature reveals sharp decreases in stock prices when poor earnings are announced.  

These companies had a decent quarter in an economy that is relatively strong.   But let’s not tease ourselves.   The low-cash portfolio discussed in USA Today is not a buy and hold portfolio

No comments:

Post a Comment