Net cash positions form the foundation of future growth for these stocks
Companies with net cash positions have been derided by many investors over recent years. Indeed, firms that have more cash than debt have frequently been criticised for failing to maximise returns in an era of ultra-low interest rates.
Now, though, attitudes towards companies that run very conservative balance sheets is quickly changing. Rapidly rising interest rates that are set to peak at over 5pc in the coming months, coupled with an uncertain economic outlook, mean investors are realising that net cash positions equate to significantly lower risk.
Moreover, businesses that have readily available cash can capitalise on today’s rock-bottom asset prices by making acquisitions which boost their competitive position. For example, telecoms company Gamma Communications, which is a holding in our inheritance tax (IHT) portfolio, spent £9.8m on acquisitions in its most recent financial year.
They contributed to an improved performance, with revenue growing by 8pc and pre-tax profits up 14pc on the previous year. This allowed the company to raise dividends per share by 14pc, although with a yield of just 1.3pc the stock is unlikely to appeal to income investors.
According to a subsequent trading update, all three of the company’s operating segments are delivering growth and it remains on track to meet previous guidance for the full year.
A net cash position of £101m at the end of April means there is scope for further acquisitions, while the company’s performance has proved to be relatively resilient despite an uncertain economic environment.
Gamma has been able to maintain profit margins in spite of inflation. Its gross profit margin for the full year was unchanged at 51pc, with spending controls expected to manage rapid price rises over the coming months.
The proportion of its revenue classed as recurring remained at 89pc last year, which suggests its financial outlook is likely to be relatively robust and somewhat predictable.
The company’s financial performance is highly encouraging given significant recent and ongoing changes to its management team. In November last year, its CEO was replaced by its CFO. Its chair will also be replaced in July. In Questor’s view, this is unlikely to prompt a major strategy change and does not materially affect our view of the company’s long-term potential.
Trading on a price-to-earnings ratio of 16, the company’s shares continue to offer fair value for money. They have proved to be among our IHT portfolio’s best performers since being added in January 2018.
Indeed, their capital gain of 80pc highlights the potential for high returns from the small-cap segment of the stock market. Given that the company has a solid balance sheet which aids its capacity to overcome an uncertain economic environment, as well as a sound business model and long-term growth potential, it remains a worthwhile holding in our portfolio.
Questor says: hold
Ticker: GAMA
Share price at close: £11.50
Update: tinyBuild
Fellow IHT portfolio holding tinyBuild, which publishes and develops video games, also has a net cash position. It ended the 2022 financial year with net cash of $26m (£20.8m), having spent $4.2m on acquisitions during the year. It has subsequently engaged in further acquisition activity, with additional purchases seemingly likely.
The company’s financial year was, however, highly challenging. Although revenue increased by 21pc and pre-tax profits were up 27pc versus the prior year, Russia’s invasion of Ukraine prompted the firm to relocate over 100 staff members from the region.
In addition, an uncertain economic outlook and cost-of-living crisis have put pressure on the wider consumer discretionary sector. This has contributed to a 73pc decline in the company’s share price over the past year. As a result, it currently trades 82pc down since being added to our IHT portfolio just over two years ago.
This is disappointing return thus far. However, in Questor’s view, tinyBuild deserves more time to deliver on its potential. It has an attractive pipeline of new releases planned for the coming months, as well as the financial means to overcome continued economic and geopolitical challenges.
Furthermore, it currently trades on a relatively modest price-to-earnings ratio of around 10. This suggests that investors have factored in recent difficulties, as well as near-term uncertainties, and provides scope for a share price recovery over the long run.
Questor says: hold
Ticker: TBLD
Share price at close: 46.50p
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