While many Americans are living on tight budgets because of lost jobs or fear of losing a job, companies face a very different dilemma: They're sitting on growing piles of cash.
That's left companies overflowing with cash -- at least a half-trillion dollars more than they had at the end of 2008 and probably much more.
CEOs, of course, gain nothing by saving. They need to put money to work or pay it out to shareholders. So unless the economy scares them again, I expect companies will soon start unleashing their moolah.
In other words: Brace yourself for a corporate spending spree that will fund acquisitions, upgrades of plants and equipment, share buybacks and more. Think of it as a huge economic stimulus package brought to you by the private sector.
This spending spree could be just what we need to keep the economy rolling -- and certainly will benefit investors who know how to play it right.
The likely winners include companies fromand to , , , and . I'll tell you how these -- and others -- should benefit in a moment.
A rare buildup of moneyBut first, let's look at just how much cash has piled up:
- alone has accumulated an impressive $6.2 billion in cash this year. The amount of cash held by the search engine giant rose to $22 billion by Sept. 30 from $15.8 billion on Jan. 1. Google has no debt. At , cash holdings advanced $3.6 billion in September 2008 to $10 billion as of the end of June.
- As of Nov. 24, cash levels had advanced 47% over the past year at companies listed on the three major U.S. exchanges, according to Howard Silverblatt, the senior index analyst at Standard & Poor's. Cash at the 3,729 nonfinancial companies on those exchanges (NYSE, Nasdaq and AMEX) rose to $1.6 trillion from $1.1 trillion. A lot of cash has built up at private companies as well, and that's not included here.
- Inside companies, the excess of cash flow over capital spending, measured as a ratio of those two amounts, rose to 1.17 as of Sept. 30, up from 0.88 just a year earlier. That's technical, but it's also phenomenal. It's the highest this ratio has been during the past 50 years, says James Paulsen, the chief investment strategist at Wells Capital Management, and shows how much companies have been saving rather than spending.
"It's a situation unlike any that I have ever seen," says Jim Tierney, a portfolio manager at W.P. Stewart, which manages $1.5 billion in private accounts and the W.P. Stewart & Co. Growth Fund (WPSGX). "We went through just an absolutely horrible situation in 2008. The knee-jerk reaction was to pull back on anything discretionary."
The same kind of buildup in cash has been happening around the world, says Andy Corn, the chief investment officer for equities at Beacon Trust. "There are enormous amounts of money sitting on the sideline in Europe, China, India and Brazil," he says.
Why companies will spendSo the cash is there. But how can we know companies are actually going to start spending? I'll cite three reasons:
- Each time cash flow has come close to exceeding capital spending by as much as it does now, big waves of spending followed, Paulsen says. He thinks managers will open their checkbooks because they feel more confident now that profitability, stock prices, the credit markets and, to some degree, sales growth have improved.
- Many companies still look cheap, and so they are tempting acquisition targets for companies looking to expand. (Read "The big deal is back on Wall Street.")
- Industrial capacity, a proxy for the U.S. economy's capital base, is declining, which has happened just twice in recorded economic history, says Deutsche Bank economist Joseph LaVorgna. This shows you just how much companies have let themselves go, delaying work needed to upgrade plants and equipment. They have to spend soon to keep up with the world.
The comeback to predictions of a capital spending spree is that there is still a lot of spare industrial capacity in the system and that the global economy can produce more without expanding capacity. But that doesn't refute the thesis. Coming out of recessions, capital spending usually picks up well before the economy is running at full capacity, LaVorgna says.
The investing anglesTierney, of W.P. Stewart, and Corn, of Beacon Trust, recently shared ways to invest in the coming corporate spending spree. They're both worth listening to because of their performance.
The W.P. Stewart & Co. Growth Fund has advanced 22% this year, compared with 15% for the S&P 500 Index($INX). Beacon Trust's large-cap value investing strategy is up 15.4% net of fees since its 2004 launch, compared with 1.3% for the S&P 500.