Don’t Invest In These Cash Hoarding Companies
A new report from FactSet shows that companies are stockpiling cash like some deranged hoarder on a reality TV show.
If you haven’t seen any of the Hoarders shows on A&E about people who fill their homes from floor to ceiling with useless belongings… it’s mind blowing and sad to see what these poor souls are doing.
Many of these hoarders have undergone some sort of trauma or loss that triggered this bizarre and unhealthy behavior.
More often than not, it takes a full blown intervention and some tough love by friends and family to help them deal with the root cause of their problems. Only then can they stop masking their issues by hoarding these useless belongings.
Somehow corporate America’s CEOs have been struck with the same affliction. But instead of hoarding useless belongings… they’re hoarding useless cash.
Right now, cash balances at the non-financial companies in the S&P 500 are a record high $1.43 trillion.
Why companies are hoarding cash
The 2008 financial crisis and the Great Recession that followed was a traumatic moment in world history. It hit everyone from Main Street and Wall Street hard.
It has changed the behavior of consumers… the home ownership rate in the US has plunged and many young Americans have little desire to own a home these days.
It’s impacted senior managers at large companies in the same way.
The trauma of the crisis has neutered these managers. They no longer see opportunity and a reason to invest in the future. They only see risk and fear another downturn could cost them their high paying job.
So, they hoard their cash to mask their true problems like all people that are stricken with the affliction.
An intervention for cash hoarding companies?
The problem for these companies and for America is that their failure to invest in their future is a death sentence for the companies and the US economy.
It’s no secret economic growth is driven by investment in new ideas and new products… there’s a reason that Apple $AAPL is the most successful company in the world.
Those that fail to invest in the future will eventually see their opportunities and growth disappear. And that’s bad news for investors.
But if that’s the case, why haven’t shareholders staged an intervention with these managers to make them stop hoarding cash?
It’s simple, managers are doing just enough to boost share buybacks and increase dividend payouts to keep investors quiet. In other words, they’re paying off investors with short term solutions that look good now but do little to help the company in the future.
Avoid cash hoarding companies
I believe that large companies that fail to invest in future opportunities and buy investors’ silence with stock buybacks and dividend hikes are poor investments.
Investors that want to invest in stocks with bigger opportunities should focus on companies that are willing to invest in the future.
An easy way to do this is by investing in small-cap stocks.
Most of the smaller companies don’t have the ability to sit back and coast on their past successes. They don’t have the cash flow and ability to boost short term stock performance through financial engineering the way larger companies do.
In order to be successful, smaller companies have to invest in themselves, focus on growing and improving their business, and find new opportunities.
What’s more, with large companies on the sidelines hoarding cash, the opportunities for smaller companies to innovate and develop new products is better than ever.
A simple way to get exposure to these smaller companies that are investing in their future is with an ETF focused on small cap stocks. The iShares Russell 2000 ETF $IWM is one of the most popular small cap ETFs around.
IWM tracks the Russell 2000 small cap index. These are 2000 of the smallest companies in the Russell 3000 index. And it’s full of small companies that aren’t hoarding cash like the companies in the S&P 500.
Good Investing,
Corey Williams
Note: Corey Williams writes and edits ETFTradingResearch.com. Sign up for our free ETF reports and free e-letter at http://etftradingresearch.com/free-sign-up. We’re devoted to helping you make more money from ETFs.
Category: What's Going On?
