The next big thing
Thursday, February 18th, 2010The title sounds like a terrible advertisement, doesn’t it?
I wonder if anyone is still reading this, given I haven’t updated in quite a while.
Anyway, the amount of cash and cash equivelents in the S&P 500 has reached $1.19 trillion dollars.(http://www.bloomberg.com/apps/news?pid=20601087&sid=aE6W8c9z9Bms&pos=5). That’s a lot. The linked story goes into the details of why and how this is happening. It’s what you’d expect, corporations are trying to insulate themselves against the credit market, they are cutting costs, freezing hiring, not buying back stock, etc.
All that detail is completely uninteresting to me, as I am thinking about the next 5-10 years, not the current year.
So, what happens in 5 years? We are going to have a lot of cash that is going to need to be reinvested, if for no other reason than the market punishes the company for a lower ROE (you don’t make money on cash). It seems that companies are going to find it highly profitable to buy back their own stock. You have tons of cash. You have an economy that doesn’t yet give you a lot of places to invest it profitably. And you have the huge benefits of buying back your own stock.
That doesn’t translate into specific investment advice, but I’m guessing that in 10 years or so we’ll be reading about fabulous wealth created by these acts. Right now I’m heavily in the oil&gas sector, where they are busy investing in infrastructure and such. I think for future purchases I’ll be taking this factor very seriously - buying cash rich companies run by a CEO that has a history of being friendly to stock buybacks. It’s not a strategy that will hurt, given we are talking about buying healthy companies at a discount, but it sure could result in a handsome payday as those assets get multiplied by the buyback.