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Wednesday, April 22, 2009

More cash, less debt = stock market gains?

Today there were a couple of posts about how tech stocks are currently especially attractive because they hold plenty of cash and tend to have little debt. Paul Kedrosky initially caught my eye with his post "Tech Cash is King" which in turn pointed me to a story on Bloomberg by Eric Martin.

I ran a screen tonight that looked at both cash and debt. Specifically, I screened for a Price-to-Cash ratio under three, a Debt-to-Equity ratio under three and a Market Cap greater than $2.5 million. Based on these criteria, I obtained a list of 136 stocks.

Judging from our list, it is absolutely true that many tech stocks do seem to have lots of cash and little debt. What also became apparent as I went through the list is that there are also a lot of pharmaceutical companies that meet these criteria. Below is a shortened list that should give you a general flavor of this screen's result:

SymbolNamePricePEPrice To SalesPrice To BookDebt To EquityCash
ADPTAdaptec, Inc.$2.9050.892.330.81No Debt$371,210,000
AIRVAirvana,Inc.$5.8119.112.632.24No Debt$228,370,000
BBNDBigBand Networks, Inc.$5.9941.382.12.8No Debt$174,630,000
BMRNBioMarin Pharmaceutical Inc.$12.4042.984.274.581.7976$559,970,000
CBSTCubist Pharmaceuticals, Inc.$16.396.842.323.220.9616$409,020,000
CCMPCabot Microelectronics Corporation$27.1524.381.871.450.005$223,100,000
CNCCENTENE CORPORATION$19.3610.480.261.690.5279$480,390,000
COHRCoherent, Inc.$18.35120.330.770.77No Debt$199,880,000
CRDNCeradyne, Inc.$19.634.880.740.80.1927$221,420,000
CRSCARPENTER TECHNOLOGY CORP$18.023.650.420.990.3583$296,700,000
CYMICymer, Inc.$28.1521.511.691.5No Debt$283,290,000
DELLDell Inc.$10.638.720.354.860.4444$9,092,000,000
DRIVDigital River, Inc.$33.4422.453.272.030.0146$500,330,000
EHTHeHealth, Inc.$16.8929.783.622.63No Debt$150,630,000
EIXEDISON INTERNATIONAL$27.737.660.650.971.1249$4,250,000,000
ELNKEarthLink, Inc.$$486,560,000
ENDPEndo Pharmaceuticals Holdings Inc.$17.898.61.691.880.3296$782,190,000
ENEREnergy Conversion Devices, Inc.$16.3915.372.051.070.5017$433,770,000
ESGREnstar Group Limited$71.4011.0718.581.510.6364$3,144,600,000
FAROFARO Technologies, Inc.$15.6518.731.251.230.0013$105,460,000
FORRForrester Research, Inc.$20.9116.141.911.52No Debt$213,430,000
HLITHarmonic Inc.$6.819.911.741.53No Debt$327,160,000
HLTHHLTH Corporation$11.544.423.062.561.417$630,220,000
HSHEALTHSPRING, INC.$9.574.510.250.70.314$285,500,000
HUGHHughes Communications Inc$17.2137.250.331.041.7102$203,820,000
INFAInformatica Corporation$13.9024.372.723.460.6209$460,930,000
IPXLImpax Laboratories, Inc.$5.5417.51.552.010.0376$119,980,000
ITGINVESTMENT TECHNOLOGY GRP$21.418.351.251.20.12$352,960,000
LDKLDK SOLAR CO., LTD$7.555.920.581.10.6884$338,910,000
LXKLEXMARK INTERNATIONAL INC$17.956.80.311.750.7988$973,300,000
MIRMIRANT CORPORATION$13.362.230.640.550.6991$2,035,000,000
MKSIMKS Instruments, Inc.$17.0727.21.230.860.0005$278,870,000
MLNXMellanox Technologies, Ltd.$10.2313.412.71.360.0041$181,010,000
MOHMOLINA HEALTHCARE, INC.$20.539.320.181.10.3917$577,030,000
MRXMEDICIS PHARMACEUTICAL$13.2173.971.451.240.2805$343,880,000
NCRNCR CORPORATION$9.817.530.33.680.0159$711,000,000
NIHDNII Holdings, Inc.$14.337.340.611.461.2274$1,325,250,000
NTAPNetApp, Inc.$18.8460.11.653.890.8282$2,460,870,000
NTGRNETGEAR, Inc.$12.5723.290.551.04No Debt$203,010,000
NVRNVR, INC.$504.0028.340.741.950.1531$1,147,640,000
OMCLOmnicell, Inc.$8.7623.491.121.21No Debt$120,440,000
ORBORBITAL SCIENCES CORPORATION$15.1113.630.681.750.3152$328,310,000
SAYSATYAM COMPUTER SERVICES ADR$1.891.610.320.380.0102$1,147,400,000
SEPRSepracor Inc.$13.503.$691,630,000
SIGMSigma Designs, Inc.$12.2712.481.511.04No Debt$119,710,000
SNWLSonicWALL, Inc.$5.6263.931.321.08No Debt$105,450,000
SONOSonoSite, Inc.$19.0716.241.341.420.6295$279,140,000
SPSSSPSS Inc.$30.6716.51.862.670.7109$305,920,000
TECDTech Data Corporation$26.2810.820.050.760.2098$528,020,000
TEXTEREX CORPORATION$11.6717.420.120.690.8111$484,400,000
TSLTRINA SOLAR LIMITED$12.875.830.40.770.3415$132,220,000
TSRATessera Technologies, Inc.$13.79145.732.741.52No Debt$276,500,000
UTEKUltratech, Inc.$13.6126.912.41.630.002$158,500,000
VPHMViroPharma Incorporated$4.995.981.650.580.3782$275,840,000
XIDEExide Technologies$4.716.410.10.791.4021$148,410,000

The articles today discussed how tech has outpaced all other sectors in stock price gains thus far this year in part due to the attractiveness of their strong balance sheets. Given what we see in the table above, I was curious how the pharmaceutical sector has fared in comparison to tech.

The chart above compares a tech ETF (XLK), a pharma ETF (XPH) and a biotech ETF (XBI). You can see that tech has indeed rallied more strongly in 2009 but it is also apparent that the pharmaceutical sector in general held up much better than tech during the severe stock market decline in 2008.

Pharmaceuticals benefit not only from their cash holdings and lack of debt. It is also true that they are generally considered a defensive sector due to the tendency for demand for their products to remain steady even during economic downturns. These strong balance sheets, however, must also play a part in why they are viewed as attractive stocks during tough times.

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