Cheap stocks: 20 cash-rich companies

By Michael Brush

One of the great things about a wicked bear market like this one is that it gives you the opportunity to buy some successful businesses not just cheap but virtually for free.

Here's what I mean:

Lots of companies are sitting on cash hoards -- maybe because they took advantage of the stock market when it was strong to raise money and tuck it away.

Now, in this severe bear market, some stock prices have been beaten down so much that the overall market value of many companies is lower than this cash on hand. Whatever money you put into these stocks is backed by the same amount or more in cash, so you are getting the business for free.

Even companies that have only half of their total market capitalization backed by cash belong in this same cash-rich category. They're compelling buys that are likely to outperform for two simple reasons:

• You can be pretty sure they will survive the recession and come out on the other side ready to grow again, because they have enough dough on hand to power through, says John Buckingham, who regularly hunts for cash-rich companies to put in his Al Frank Fund, VALUX (VALUX). Most of the examples below come from Buckingham's research.

• Many cash-rich companies get stronger during recessions because they use their financial firepower to buy weaker competitors, or they survive while competitors go out of business, says Whitney Tilson, another value manager and a portfolio co-manager of the Tilson Focus Fund (TILFX).

It's the money -- and a lot more

The first group of cash-rich companies I highlighted in a column during a recession went on to advance by more than 100% in a few months, as the economy began showing signs of a rebound.

That's no guarantee my current crop of 20 well-heeled companies will do the same, of course. And to get decent returns with cash-is-king companies, it's important to follow a few basic rules:

• Buy lots of them. If you buy just one or two, you're gambling because any single company can stay in the doldrums for a long time or blow up because of some disaster. Buy 10 and your winners are more likely to offset your losers, producing smart gains overall.

• Have a long-term time horizon. Given the way the market is acting, many of these stocks could decline significantly before they switched over into sustained upward moves. You should be psychologically prepared to hold your cash-rich stock portfolio for at least two to three years to see gains.

• Dodge the exuberance. All of these companies are small-capitalization stocks. That means their shares bounce around a lot. So please pay attention to the buy-limit prices in the table below to avoid buying into a temporary spike, including one that may be caused by this column.

It's also important to stick with winners. What good is buying a company for the "safety" of its cash hoard if it is losing money?

Steady losses are a sign of a poor business or a signal that the juicy cash hoard you were counting on for safety may soon vanish. There are enough cash-rich companies out there making money that you don't have to mess with the losers. So I excluded money-losing cash-rich companies in my list.

First, let's look into the details:

3 vanity plays

I'm not surprised to see cosmetic-surgery stocks taking a severe hit during the recession. When money is tight, getting wrinkles and cellulite removed probably takes a lower priority for even the most vain. Plus the credit crunch has hit doctors, too. They don't have as much money to buy expensive equipment.

But vanity never goes out of style. So I'd expect these three vanity plays to do well once the economy rebounds. One thing for sure, all three of these have enough cash to survive the hard times and come out on the other side, ready to nip, zap and treat everything from unwanted fat and cellulite to pimples.

Based in Israel, Syneron Medical (ELOS, news, msgs) makes equipment used to get rid of unwanted hair, acne, wrinkles and unsightly veins in the legs, among other nasty stuff. Buckingham likes the stock because it has above-average operating margins, enough cash to continue buying companies at bargain prices, and joint ventures with Proctor & Gamble (PG, news, msgs) and EverCare Medical, a big cosmetic-surgery hospital in China.

Palomar Medical Technologies (PMTI, news, msgs) and Cutera (CUTR, news, msgs) are two other cash-rich companies that Buckingham likes. They sell lasers used for cosmetic surgery.

3 that insiders like

It makes sense when investing to combine powerful signals. Company insiders know the future best, which is why these three companies look like good long-term plays for a portfolio of cash-rich companies.

Insiders recently bought more than $400,000 worth of shares at Pros Holdings (PRO, news, msgs), a tiny company with solid profit margins and cash flow that sells software that helps other businesses set prices.

Insiders were also huge buyers in November at Infinera (INFN, news, msgs), which makes optical networking equipment, and Interactive Intelligence (ININ, news, msgs), which makes software used in call centers and phone systems.

A bad-guy play

The war in Iraq may be cooling down, but things are heating up in Afghanistan. And given the state of geopolitical affairs, those won't be the last two hot spots in the headlines over the next few decades.

When troops and undercover agents go into these areas, they often drive vehicles protected by armor made by a South Carolina company called Force Protection (FRPT, news, msgs), which has solid revenue growth, decent cash flow and a lot of cash.

A China play

Once the market turns, you can bet China plays will come back into style -- because that's where the growth is.

An attractive and beaten-down play on China growth is Focus Media Holding (FMCN, news, msgs), which distributes marketing video clips on screens in high-traffic public places such as shopping malls and airports.

A chip play

Because demand for high-tech consumer products that use semiconductors falls sharply in economic pullbacks, the stocks of chip companies are notoriously volatile.

Likewise, they rocket higher a lot faster than the rest of the market in a recovery. One that should do this is Sigma Designs (SIGM, news, msgs), which makes digital media processing chips used in Blu-ray DVD players, high-definition TVs and computers.

Continued: 3 software plays

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