Cramer: Cash is NOT king—Top 5 cash hoarding companies
When Jim Cramer looked at the top five cash rich companies through the lens of the current investment environment, he came to the conclusion that cash is not king.
"This market is making a judgment, a judgment that companies that have a lot of cash don't have much growth, and the cash is literally being held against them," the "Mad Money" host said.
Cramer was intrigued by a piece in USA Today that stated one-third of the cash on balance sheets in U.S. businesses are held by just five companies. They are Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), Alphabet (NASDAQ: GOOGL), Cisco (NASDAQ: CSCO) and Oracle (NYSE: ORCL).
"That is an incredible statistic, but what I think is even more amazing is that the stocks of those five companies are doing quite poorly, down almost 3 percent on average," Cramer said.
Additionally, companies with the 10 largest cash positions aren't beating the market on average either.
Cramer attributed this to three reasons: first is that the market prefers growth over value. Thus, cash-heavy companies are being priced as if they are slower growing value plays.
Second, much of the cash is held overseas and cannot be repatriated without paying federal taxes.
"That excuse for underperformance is a bit of a canard. If there is a good use for that capital, then believe me, they would find a way to employ it," Cramer said.
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Third, each company has its own specific issues, which Cramer decided to address individually.
The first is Apple, which has more than $233 billion in cash and has seen its stock drop 8 percent for the year. Cramer says the market is valuing it incorrectly.
Investors view Apple as a smartphone company with nothing else cooking, when it actually generates a strong service-revenue stream. Cramer thinks the service aspect of the company will take on a larger role if the company used some of its cash to boost it.
Microsoft has a $105 billion cash hoard and a stock that has fallen more than 9 percent for the year. The company is still in transition, moving toward cloud-based software. The stock was devastated when it reported, and both cloud revenue and PC business showed slower growth. The problem with this stock is that no one seems to know if the cloud business has reaccelerated while the PC business has gotten worse.
Alphabet was next, with a $75 billion lump of cash and a stock that is down 7 percent this year. Like Microsoft, Alphabet missed the quarter. However, Cramer believes this company has more control over its own destiny, and he thinks it should put the money to work to augment YouTube's earnings stream.
Fourth was Cisco, with $63 billion in cash; it's shares are up 3 percent for the year. The gain was the result of a solid quarter, which included acceleration in revenue that Wall Street wasn't expecting. Cramer thinks the market is severely underestimating what Cisco can do with all that cash.
Finally, there was Oracle, which has $50 billion in cash and is up 7 percent for 2016. It is also trying to pull off a transition into the cloud world. The stock currently sells at 14 times earnings, which suggested to Cramer that the market is skeptical. Cramer thinks the issue is that there is so much competition in the space, though there could be more room for cloud players.
"The cash is viewed as a sign that these companies have few opportunities to grow, otherwise they would be spending it. I think that is nonsense," Cramer said.
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