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What are we looking for?

Companies that could go on an opportunistic hunt for bargains.

The screen

The economy has been battered this year and many companies are struggling financially. Ultimately, some will fail. When the economy recovers, the financially sound giants of their respective industries may emerge with an even more dominant market position, as happened after the previous recession.

The stock market has also been battered, leaving investors with the potential opportunity to buy companies for a bargain. But the giant companies of the world have the same opportunity. Between them, Microsoft Corp. and Berkshire Hathaway Inc. are sitting on US$200-billion in cash and short-term investments. There is no reason for this – the cash should be distributed to shareholders, either in the form of buybacks or dividends – unless they are planning for massive investment, either capital spending or acquisitions.

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We will first screen for companies that have more than US$50-billion in cash and short-term investments.

From this list we filter out those with goodwill greater than US$50-billion. This is indicative of valuations of past acquisitions that may have to be written down because of depressed economic activity and stock-market valuations. (Warren Buffett’s Berkshire Hathaway, for example, doesn’t meet this criteria with its more than US$80-billion in goodwill.)

Finally, we look at how the companies’ broad sector has performed over the past month. Poor share-price performance in the sector as a whole is a sign that competitors (in a horizontal merger) or customers and/or suppliers (in a vertical merger) could be purchased at a bargain.

More about Refinitiv

Refinitiv, formerly the financial and risk business of Thomson Reuters, is one of the world’s largest providers of financial markets data and infrastructure, serving more than 40,000 institutions worldwide. Refinitiv’s environmental, social and governance (ESG) data cover more than 70 per cent of the world’s public companies by global market capitalization, using more than 400 metrics.

What we found

Not surprisingly, many of the world’s largest companies passed the screen. The largest, Saudi Aramco Oil Co., is also in the sector – energy – that has lost the most value over the past month. The price war that Saudi Arabia is waging with Russia could put many of its rivals out of business. However, the longer-term prospects of oil and the kingdom’s human-rights record may dissuade many investors.

The world’s second-largest company – Microsoft – is in the technology sector, which might find its services in higher demand as the people across the world continue to isolate at home, but they will have to compete with the other Silicon Valley giants as well as South Korea’s Samsung Electronics Co. Ltd.

There may be competition in the auto industry as well. Year-to-date, Tesla Inc. has returned more than 22 per cent, and investors in Toyota Motor Corp. and Volkswagen AG have lost 16 per cent and 31 per cent, respectively. Toyota and Volkswagen may look to acquire smaller rivals to enhance their electric-vehicle capability and challenge Tesla to be the car manufacturer of the future.

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Investors are advised to do their own research before trading in any of the securities shown below.

Select companies with mountains of cash

CompanyTickerTRBC ActivityTRBC SectorSector 1M Rtn. (%)Company 1M Rtn. (%)Mkt. Cap. (US$ Mil.)Cash & Short Term Invstmts. (US$ Mil.)Goodwill (US$ Mil.)Div. Yld., NTM (%)1Y Rtn. (%)Recent Close (Native)
Saudi Arabian Oil2222-SEIntegrated Oil & GasEnergy-18-101,594,78259,57529,8024.7-1530.15
Volkswagen AGVOWG-DEAuto & Truck Manuf.Cons.Cyclicals-13-2963,14461,55236,9694.6-25118.70
Amazon.com Inc.AMZN-QInternet & Mail OrderCons. Cyclicals-134977,67555,02114,7720.081,963.95
Toyota Motor Corp.7203-TSEAuto & Truck Manuf.Cons. Cyclicals-13-5196,76052,582n/a3.446,501.00
Microsoft Corp.MSFT-QSoftwareTechnology-9-11,218,717133,81942,2731.336160.23
Samsung Electronics005930-KSPhones/Handheld Dev.Technology-9-12259,80494,2106,1853.4847,750.00
Apple Inc.AAPL-QPhones & Smart PhonesTechnology-9-71,114,916100,5575,8891.335254.81
Alphabet Inc.GOOGL-QSearch EnginesTechnology-9-14788,017119,67520,4370.0-41,146.31
Facebook Inc.FB-QSocial Media & Netwkg.Technology-9-14473,03254,85518,9640.0-2165.95
China Mobile Ltd.0941-HKWireless Telecom Svcs.Telecom. Svcs.-7-9152,22160,4725,0435.6-2557.65

Source: Refinitiv

Recent share price close in native currency. TRBC = Thomson Reuters Business Classification. 

Hugh Smith, CFA, MBA, is director of Refinitiv’s ESG investment management business for the Americas.

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