Why Cash Is No Longer King

Submitted by Abby Joseph at Profit Confidential as part of our contributors program.

With employment figures the big news of the day, the business of human resources (HR) is still a good one.

Technology is changing the HR landscape, and I believe that exposure to this industry is useful as part of a stock market portfolio—but at the right price.

Automatic Data Processing, Inc. (NASDAQ/ADP) out of Roseland, New Jersey is the blue-chip payroll and HR outsourcing firm that many regard as a technology stock. The company is a great barometer on employment, investor sentiment, and the stock market.

Like many blue chips, Automatic Data Processing (ADP) did nothing for 10 years after 2001. The stock broke out of its sideways trend in 2011.

For such a mature enterprise, ADP has significantly increased in price over the last two years. I like this business, but I view it as fully priced, given current earnings.

The Ultimate Software Group, Inc. (NASDAQ/ULTI) from Westin, Florida struggled initially to find its stride, but the stock (which is more than fully priced) has certainly found it now.

This firm is a cloud provider of HR services and has a lot of growing corporations as customers. As an enterprise, this is exactly what you want.

First-quarter 2013 earnings saw revenues grow 25% to $97.9 million.

Generally Accepted Accounting Principles (GAAP) earnings were $4.5 million, or $0.16 per diluted share, compared to first-quarter 2012 GAAP earnings of $1.0 million, or $0.04 per diluted share.

Non-GAAP earnings excluding stock-based compensation were $9.2 million, or $0.32 per diluted share, compared to $3.7 million, or $0.13 per diluted share year-over-year. Cash and marketable securities grew to $79.0 million from $68.0 million.

Looking at revenues and earnings this first quarter, it’s very clear that many large corporations actually are in better shape than they were this time last year.

But the numbers also reveal weakness. And that weakness is in the ability of the marketplace to deliver real economic growth.

The stock market has gone up as institutional investors bet that the U.S. economy will improve in the bottom half of the year. This is a possibility.

Corporations have unprecedented amounts of cash to jumpstart the U.S. economy. But they still aren’t spending; they are keeping it and returning more to shareholders. This is the real problem, and it’s fostered by a continued state of uncertainty and nervousness.

The Federal Reserve’s unprecedented monetary actions have provided an environment in which institutional investors can buy the stock market.

The result of ballooning amounts of cash and a continued lack of corporate investment, combined with ballooning amounts of monetary stimulus, in effect, have proven to cancel each other out.

All the loose cash has created virtually nothing except a paper stock market gain.

There continues to be a lack of real economic growth and genuine employment gains with greater labor force participation.

Healthy balance sheets are extremely important. But the unwillingness of corporations to invest is what’s holding everything back.

Investment risk right now is increasing.