Cash boxes

I prefer three types of investments, net-nets, cash boxes, and two pillar stocks.  My reasoning behind investing in net-nets is pretty well covered throughout the blog.  I've covered two pillar stocks through a few examples, such as Nexeya, Gevelot, Hanover etc.  While I've covered a number of cash boxes I have never expressly discussed why I like them and why they're worth considering as investments.

This post came about as I looked over my portfolio and realized that I own 20 holdings in my portfolio that are cash boxes and they all fit a similar investment profile.  Some of these cash boxes are net-nets as well, but not all are.

It might help to define what I'm talking about when I mention a cash box company.  Most investors when they hear the term think of the stereotypical cashbox: an old obsolete company barely making a return that has hoards of cash at their disposal.  The company is of secondary concern to the pile of money in the company's possession. I prefer to define a cash box as a business where a significant, if not majority of the company's market cap consists of cash.  For example if a company were to have a market cap of $50m and held $30m in cash in addition to their operating business this would be a cash box.  Additionally my sort of cash box has a decent business attached which I'll cover below.

To me there's a fine line between a cash box, and a pile of cash.  A pile of cash in the investing world is usually a bio-tech or some startup company peddling promise.  The company starts with a pile of cash that they slowly and methodically work down to zero as they develop the next greatest thing.  Very few piles of cash work out, but the ones that do work out spectacularly so.  The successes are supposed to counteract the failures, in theory.  My experience has been a few lucky people invest in the success and most everyone else chasing success ends up in the failures.  I have invested in a few piles of cash before, I have never met success, but I know failure well.  A pile of cash is often a very efficient transfer mechanism to take cash from equity investors and turn it into salaries for professional executives.

The biggest question when it comes to cash boxes is why doesn't management reinvest the cash profitably somewhere else?  The answer to this question leads to my favorite type of investment, the profitable niche business bolted onto a pile of cash.

Floating out there in the market are companies that have tiny moats in small niches of the marketplace.  These are companies like Conrad Industries, a barge builder in Louisiana.  Conrad exhibits a competitive advantage, but there is a limit to how many barges can be made in a year, and a lot of that depends on external demand.  The company is extremely profitable and earns excellent returns on their invested capital, the problem is they have nowhere to reinvest that excess cash.  With management worrying about running the company and not managing an investment portfolio the excess cash builds.  Sometimes management will try to justify the cash saying they're on the lookout for an acquisition, or it helps them to be flexible.  When managers repeat that they're on the hunt for an acquisition, but one never happens it's a pretty good sign one will never happen.  I liken this to the person who only wants to golf on a day when it's 75 and sunny without a breeze and not a weekend.  If the golfer is lucky they might find that day once a year at most.

The best cash box companies are actually good businesses.  If excess cash is removed from the balance sheet these companies make reasonable returns on equity.  Management is prudent and invests in the business wisely.  There is often some growth in both revenue and earnings.  The problem is the business isn't able to support the amount of cash that's being generated.

For many investors excess cash is a worrying sign, it's read as a signal that management doesn't know how to reinvest.  I see excess cash differently, to me the excess cash in many cases is a sign of prudence on the part of management.  Instead of wasting money on dubious investments they prefer to let it sit idle for some point in the future.  For many of these companies if the cash were paid out as a dividend the companies would suddenly become extremely attractive.

I like to look at a company, back out the cash and then evaluate the company on the reduced basis.  Suddenly a company with a 5% ROE can have a 18% ROE once the excess cash is taken into account.

So what are the things to look for in finding the ideal cash box?

1.) A business that's stable and possibly growing, not in decline.
2.) Management that isn't hasty to spend the excess cash and is conservative in operation.
3.) Management that is invested in the business.
4.) Management that is aware of shareholder value.
5.) A low valuation, I prefer cash boxes selling for less than book value, or less than cash (gross not net, but I'll take net if it's available)
6.) Consistent earnings, but more importantly consistent cash flow.
7.) A business model that can survive the test of time.
8.) A debt free, or very low debt amount on the balance sheet.
9.) A cash balance that's growing and has grown over time, not the result of a one time sale or other event.

When all of these factors come together it is usually the type of company I will invest in.

The second biggest question with a cash box is what happens next?  What's the point of investing in a business even if it's decent if it continues to accumulate excess cash and go no where?

Many of these companies do eventually do something good with the cash.  A cash box I own, Goodheart-Willcox repurchased a significant amount of their shares at less than book value.  They trade at $72 and are on track to earn about $6 this year.  That doesn't seem that impressive until you back out the $60 or so in excess cash, suddenly the company is selling at a P/E of 2x.  And their cash is piling back up, they have shown a willingness to repurchase shares, they might do it again.

Some cash boxes eventually pay out large dividends.  A number of them paid special dividends around December of last year before proposed dividend tax increases were supposed to go into effect.  A company barely cash flowing their debt isn't able to pay out a large special dividend, a cash box has that flexibility.

I believe value is it's own catalyst.  When I buy a company for less than book value, of which 70% is excess cash, and the company's operations are profitable, earn reasonable returns, and management is honest and shareholder friendly, I don't see how an investor can go wrong.  These are boring companies that might languish in a portfolio for years.  But if an investor's goal is to buy safe companies cheaply cash boxes surely play a role in the portfolio.

Talk to Nate

Disclosure: Long Conrad, Goodheart-Willcox, and 18 other cash boxes!


  1. Nate, I was reading your post and what struck me was a somewhat related aspect: how to screen for stocks.

    Screening is obviously an important tool, but HOW to screen is a vague skill.

    When you spoke of the difference between a ROE of 5% and a ROE of 18% once cash is backed out, I thought to myself that a company such as this would not show up on a particular screen I usually use which includes ROE > 15%.

    So it is important when screening to (1) know specifically what you are looking for and (2) account for the details which might be hiding potential results!

    1. You can use return on invested capital (ROIC) instead of ROE. This will also account for companies using debt to leverage the balance sheet and attain good ROE percentages.

      Wikipedia has a good explanation of it

  2. by your criteria, Loews is a cash box, no?

    1. They are, I have looked at them in the past but for whatever reason never invested.

    2. doesn't it fail 9 & 10 above?

  3. great post. reminds me of EVI

  4. "For many investors excess cash is a worrying sign, it's read as a signal that management doesn't know how to reinvest. I see excess cash differently, to me the excess cash in many cases is a sign of prudence on the part of management. Instead of wasting money on dubious investments they prefer to let it sit idle for some point in the future."

    This strikes me as very true. It is a sign of maturity in management that they understand their business reinvestment opportunities are limited.

    One thing that trips me up, however, is that when the company looks so cheap it makes too much sense to buyback shares. Why don't they do it? I know many CEOs and Boards and operators and not capital allocators, but sheesh, this strikes me as basic. As you mention, many eventually come around, but I often have that nagging feeling that management is scared to lose the cash cushion and if they are scared, should I be? I think you have the right viewpoint, Nate, and if you invest in enough of these they will work out. But this is the personal psychology I deal with.

  5. Regarding cash boxes, have you had a look at Zampa SA (listed in Greece)? No debt, EUR 13M in cash (part of it in and out of the bank and short-term AAA EIB bonds) with a market cap of less than EUR 5M. The funny thing is that the interest they earn on the cash more than covers the operational losses and makes them profitable (they pay nice dividend). They are the official distributor of Sharp air conditioners, which is quite a bad business, but revenues picked up a bit in 2012. It will make for a good case study some day...

  6. Nate, how do you define Excess Cash? The McKinsey Valuation books definition is:

    Excess Cash = Cash & ST Investments - (2% of Revenue)

    I find that this is a little aggressive however, and tend to use 5% of revenue. Backing out Excess Cash is definitely necessary however in order to get a sense of the true ROIC.

  7. Love Goodheart-Willcox numbers and business but how on earth did you get it?? Last traded Aug 6!

    1. I just put in a GTC order at the midpoint of the bid/ask. I purchased about a year and a half ago, the order executed in a day. There is some liquidity that doesn't appear in the online quotes as well.

  8. How do you get financials for goodheart willcox?