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Editor's Corner
What To Do With Cash
Ron Rowland
Corporate America is flush with cash. The technology bear market a dozen years ago taught companies to control their urge to invest in new capacity and personnel. The financial bear market, of more recent vintage, encouraged companies to fortify their balance sheets. Corporate America took these lessons to heart and is now sitting on much of its profits from the past ten years. Believe it or not, there is such a thing as too much cash.
For companies, there comes a point when excessive cash becomes a noticeable drag on ROE (Return On Equity) calculations. When that point is reached, boardrooms start to discuss their options. They can institute or increase dividend payments, enter in to stock buybacks, go on an acquisition spree, or ignore the pressure from analysts and shareholders. In recent years, the favorable tax treatment of dividends made that option preferable to many shareholders. Stock buybacks are typically welcomed by those seeking capital appreciation. Additionally, there are times when acquisitions make the most sense, whether the reason is to spur top-line growth, shore up bottom-line profits, or just to take advantage of a good deal.
The merger and acquisition path seems to be garnering a large amount of attention these days. The US Airways Group (LLC) merger with AMR Corp (AAMRQ), Warren Buffett’s Berkshire Hathaway (BRK.A) acquisition of Heinz (HNZ), and Office Depot’s (ODP) proposed takeover of OfficeMax (OMX) are all the buzz lately, and more deals are likely to follow. Perhaps this will become 2013’s preferred method of reducing corporate cash.
The stock market has been moving steadily upward so far in 2013. A pullback is inevitable, so it’s not a question of if, but when. Perhaps it’s starting today. The low-volatility climb of recent weeks makes today’s 108-point drop in the Dow seem larger and more painful than it actually is. Granted, some groups are feeling it more than others - precious metals, miners, and homebuilders are among the biggest losers today. However, not every group is down. Tobacco, insurance, and soft drinks posted gains.
The Fed released minutes of the January FOMC meeting today. Officials are beginning to worry about the potential for negative effects from the extended easy-money policy. Some members are suggesting that policies might need to change prior to the unemployment rate reaching 6.5%, which is the current threshold for action. Further evaluation and discussion is planned for the March FOMC meeting.
Investor Heat Map - 2/20/13
Sectors
Industrials climbed ahead of Financials this week to once again take over the leadership role in the Sector rankings. Financials only managed a one-week stay at the top, but it didn’t fall far, landing in second place. Energy held steady in third place with the energy services segment posting impressive gains. Consumer Discretionary remains in fourth with volatility picking up among retailers and homebuilders. Health Care has been quietly posting new highs as it hangs on to fifth place. The lower portion of the Sector rankings had more shifting of positions than the upper half. Consumer Staples climbed two positions as Berkshire Hathaway’s (BRK.A) bid for Heinz (HNZ) signifies there is value in the sector. Real Estate’s ranking was unchanged while Materials slipped two spots to eighth. The bottom three remain the same, although their order changed this week. Utilities heads up the laggards, and Technology climbed out of last place, a position it held for four weeks. Telecom is the new cellar dweller thanks to extreme weakness in second tier names such as CenturyLink (CTL), Windstream (WIN), Frontier Communications (FTR), and Level 3 Communications (LVLT).
Styles
Mid Cap Value heads up the Style rankings again this week, and Small Cap Value is close behind with the gap between them narrowing. With Small Cap Blend in third and Mid Cap Blend in fourth, there is an obvious market preference for the lower left-hand portion of the traditional 9-square Style Box. Micro Cap moved up a notch to sixth, pushing Large Cap Value down to seventh in the process. A seventh place ranking is usually not considered a good one, but today it is quite respectable given the top seven positions are so tightly bunched. The lower portion of today’s list is dominated by the Large and Growth oriented categories. Large Cap Growth and Mega Cap are posting good absolute strength numbers but are lagging the others on a relative strength basis.
Global
Pacific ex-Japan surged to the top this week, displacing Japan, which took over the top spot a week ago following an impressive climb through the rankings. Pacific ex-Japan’s strength comes mostly from its large allocation to Australia, which jumped about 4% this week. The U.S. also made a strong climb in the rankings recently and keeps its second place position today. EAFE and World Equity both moved up a notch to grab third and fourth. Japan, last week’s top-ranked global category, fell all the way to fifth. Its short-term pullback has now been completely recovered though, paving the way for an improved ranking next week. The European Union and the U.K. held their positions, and while they are not exactly positions of strength, they are ahead of the three developing market categories of Emerging Markets, Latin America, and China. Canada is stuck on the bottom for now. Strength from its energy producers is being overwhelmed by weakness in the Canadian dollar.
Comments
He proposed several strategies. I subscribed to his newsletter many years ago. The only strategy which performed better than the market was investing all money in a single Fidelity select fund, and then switching it to another when he gave a signal. All other strategies did not work that well, and he closed some of them, but this one was incredible.
And then the market started changing its direction every few weeks, and his strategy started losing money, and it continued losing money for a rather long time. I discontinued my subscription. Few years ago I decided to check the Hulbert newsletter, which follows different newsletters. I had a hope that maybe his strategy started working again. Apparently, the situation did not improve. I did not check it since that time.
I noticed that many people continue following his recommendations. My advice would be to check the Hulbert database before deciding whether you want to use his recommendations: It will cost you some money to subscribe to Hulbert, but you can get the money back in 30 days, see http://www.marketwatch.com/premium-newsletters/hulbert-interactive. In any case, it costs much less than following recommendations which may or may not work under present market conditions.
Of course the information that he presents could be useful anyway is one uses it for making his/her own decisions. And yet, it would be interesting to know whether he himself knows how to use this information successfully.
I like to read what Ron Rowland’s take is and I follow him through reading his Invest With An Edge weekly newsletter and also check his positioning in his Leadership Strategy report. For those that don’t have these links bookmarked I have provided them below.
The Invest With An Edge Newsletter Link:
http://investwithanedge.com/newsletter-archives
The Leadership Strategy Report Link:
http://investwithanedge.com/leadership-strategy
Andrei, I am sorry to learn you have lost money utilizing Mr. Rowland’s thinking … but, on the other hand … I have made good money by reading his weekly commentary and seeing how he is positioning his Leadership Strategy. It's not junk linkage by my thoughts.
I guess, investing is much like the game of golf … Some can shoot a par round with a set of clubs while others can’t take the same set of clubs and break a 100 with them. Simply stated, what works for one may not work for another. Seems golf and investing have some similarities.
I wish all … “Good Investing.”
Skeeter
Regards,
Ted
http://investwithanedge.com/newsletter-archives/022013-what-to-do-with-cash/printpage/
Long ago, I made a mistake in this respect, which is why I am warning others. In fact, it did not look as a mistake at that time, since his Fidelity Select strategy worked great year after year. The only suspicious thing about it was that this was the only strategy among many which actually worked well, until it stopped working. That is why it may be useful to look at http://www.marketwatch.com/premium-newsletters/hulbert-interactive to evaluate efficiency of the whole set of strategies offered by Ron Rowland.