Wednesday, October 22, 2014

Low-cash companies in a market correction



Background:   Awhile back I critiqued a USA article claiming the low-cash companies had outperformed high-cash companies.

The USA Today article:

My critique of the USA Today article:


My critique pointed to a number of problems with the USA Today analysis.   (A typo on returns for Microsoft, no statistics on risk and dispersion of returns, and no consideration of dividends.)

Since the USA Today article there has been a market downturn.   Today I look at how the low-cash and high-cash stocks did in the downturn.


Data:   Information on low-cash firm and high-cash firm stock prices is presented for September 10, 2014 (the date of the article) and October 16, 2014 the date of the trough of the correction.  

Here are the low-cash firms:

Low Cash Firms:
9/10/14
10/16/14
% Change
Range Resources
74.61
65.71
-11.9%
Denbury Resources
16.2
12.8
-21.0%
Southwestern Energy
38.88
31.97
-17.8%
Stericycle
117.9
117.12
-0.7%
Martin Marrietta
130.77
113.27
-13.4%
Ameren
38.81
39.58
2.0%
Republic Services
38.99
37.68
-3.4%
Windstream Holdings
10.89
10.03
-7.9%
Tractor Supply
61.62
58.53
-5.0%
Newfield Exploration
39.13
27.41
-30.0%
Arithmetic Average
-10.9%
Standard Deviation
9.9%
S&P
1988.4
1855.96
-6.7%



Here are the high-cash firms: 

High-Cash Firms
Apple
101
96.26
-4.7%
Microsoft
46.84
42.74
-8.8%
General Electric
25.95
24.24
-6.6%
Google
583.1
524.51
-10.0%
Cisco System
24.74
22.82
-7.8%
Pfizer
29.44
27.7
-5.9%
Exxon Mobile
96.81
90.6
-6.4%
Chevron
124.28
111.06
-10.6%
Oracle
40.58
37.56
-7.4%
Coca Cola
41.86
42.56
1.7%
Arithmetic Average
-6.7%
Standard Deviation
3.5%
S&P
1988.4
1855.96
-6.7%



Observations:

The five worse performing-companies in this period were all low-cash firms.

The arithmetic average return of the high-cash firms was identical to the arithmetic average return of the low-cash firms.

The standard deviation of low-cash firm returns is nearly three times larger than standard deviation of high-cash firms.


Concluding thought:  Neither the low-cash or high-cash portfolio beat the S&P 500.   The low-cash portfolio had some larger losers that really drove down performance and increased risk.  

One must be careful with this type of analysis.   The market is a moving target and results are time frame sensitive. Coke fell yesterday but Apple is on a roll.   




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