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Where Does Cash Go in 2010?
By: John Petrides
Date: 12/28/2009
Cash is abundant and is primarily sitting on the sidelines. Investors have fled to cash. Corporations have hoarded cash. From late 2008 through 2009, firms were narrowly focused on survival, so they cut costs aggressively, curtailed capital expenditure programs, suspended share repurchase plans, stopped dividend payments, and sought to paydown/refinance debt and shore up lines of credit for future operations. Now that the economy is turning around and the outlook is brightening, where does that cash go?
The focus of businesses has turned from survival to opportunity. Firms that completed the aforementioned survival tactics (cut costs, slashed the dividend, repaid debt, etc) are now looking for ways to grow. There are several strategies, but three broad categories dominate discussion: 1. Reinvest in the business through labor and technology; 2. Reward shareholders by reinstating/growing the dividend and or repurchasing shares at low valuations; 3. Seek M&A opportunities to broaden revenue streams, or consolidate to gain scale. Although some of these tools have already begun, it is our belief that all three strategies will be used in 2010 to put cash to use, both domestically and internationally. This bodes well for the equity market and the overall economy.
As all-cap managers, it is our opinion that our clients will benefit from this thesis in that we can invest anywhere. For example, Large Cap stocks should perform well because they have tremendous operating leverage from cost cutting and will use all three of these cash tactics to reinvigorate strong growth in earnings per share. Small and Mid Cap stocks should also benefit from increased M&A activity, as price-to-earnings multiples will expand due to takeout premiums.
In our opinion, the survival tactics of 2009 sets the stage for a continued outperformance and recovery in the equity market. With some sensitivity to each individual's situation, we favor overweighting stocks relative than any other asset class in 2010. As long as confidence continues to come back into the market, the rally in the stock market should continue, coupled with the improving underlying fundamentals of the overall economy.
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