Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / How a $2.4 Trillion Cash Pile Is Growing Without Yield
Transcript
- Lucas: So the S&P 500 just closed at 7,415 — up another seven-tenths of a percent in the last five days — and the VIX is basically flat. Markets are calm. But there's something sitting underneath this calm that I think active investors should be paying close attention to, and it's not the usual valuation debate. Luna: What do you mean — something besides the megacap rotation everyone's been talking about? Lucas: Exactly. I'm talking about corporate cash. The total cash and short-term investments held by non-financial companies in the S&P 500 just crossed two point four trillion dollars. That's a record. And here's the kicker — the yield on three-month Treasury bills is down to one point eight percent. So this massive pile of cash is earning almost nothing. Luna: Two point four trillion dollars earning less than two percent? That's like leaving your emergency fund in a checking account that pays zero. Lucas: Right. And it's not like these companies can't find places to put it. The question is why they're choosing to hoard it. I think for stock pickers, this is a really useful signal. The way a company manages its cash tells you a lot about its culture and its long-term thinking. Luna: So who are the biggest offenders — or maybe the most disciplined? Lucas: Let's start with Apple. They're sitting on roughly sixty-two billion dollars in cash and marketable securities. That's down from their peak of over two hundred billion a few years ago, but still enormous. Apple is generating so much free cash flow that even after buybacks and dividends, the cash pile keeps growing. And they're not earning anything meaningful on it because they keep it in short-term Treasuries and money market funds. Luna: But Apple has been buying back stock aggressively. Isn't that a better use of cash than letting it sit? Lucas: It is, and they've done over six hundred billion in buybacks since 2012. But the cash pile is still there. The question is whether that cash is a buffer or a drag. At today's yields, holding sixty-two billion in cash costs Apple roughly one point one billion dollars in foregone income per year — if they could earn even four percent somewhere else. That's not nothing. Luna: So you're saying the opportunity cost is real. Lucas: Absolutely. And then there's Berkshire Hathaway. They're the extreme case. As of their last filing, Berkshire held three hundred and twenty-five billion dollars in cash and short-term Treasury bills. That's up from around one fifty billion two years ago. Warren Buffett has been selling stocks and not finding new investments. He's basically betting that the market is overpriced. Luna: Three hundred and twenty-five billion? That's almost the entire market cap of Netflix. And it's earning next to nothing. Lucas: Exactly. But here's the thing — Berkshire is a special case because their insurance float gives them a different cost of capital. Still, for most companies, a growing cash pile with no yield is a red flag. It suggests management can't find attractive investments, which is a problem if you're a long-term shareholder. Luna: What about companies that are actually putting cash to work? Are there any good examples? Lucas: Yeah, let's look at Alphabet. They have about one hundred and ten billion in cash, but they're spending heavily on capital expenditures — data centers, AI infrastructure, cloud. Their capex was over thirty-two billion last year. So they're not just sitting on it. The cash is there for strategic reasons, not because they're out of ideas. Luna: So the difference is between cash as a war chest versus cash as a mattress. Lucas: That's the distinction. For stock pickers, I think you have to look at the trajectory of the cash balance relative to free cash flow. If cash is growing faster than free cash flow, that's a warning. It means management is either too cautious or they can't find good projects. If cash is growing in line with free cash flow, it's probably just a byproduct of a strong business. Luna: And with interest rates where they are — the Fed has held steady since March, and the ten-year Treasury is at three point two percent — the pressure to do something with cash is lower than it was when rates were five percent. Lucas: Right. When the Fed was hiking, companies could earn five percent on T-bills and feel smart. Now they're back to earning less than two, and the pile is still growing. That tells me that the real reason for the cash isn't yield — it's fear. Companies are scared of a downturn, so they're building a buffer. Luna: But the market is at records. If they're scared now, when would they ever deploy the cash? Lucas: That's the paradox. And it's why I think this cash pile is actually a contrarian indicator. When everyone is scared and holding cash, it might be a sign that the market has further to run. But when companies start deploying that cash aggressively — buying back stock, making acquisitions, raising dividends — that could be a sign they think the market is cheap. Which is often near the top. Luna: So the cash pile itself isn't the story. It's what companies do with it. Lucas: Exactly. And that's where active stock picking comes in. You can find companies where the cash is a hidden asset — where the market is discounting it because it's not earning anything. If management eventually puts it to work, you get a catalyst. If they don't, you at least know what you own. Luna: That reminds me of something we talked about in previous episodes about concentrated portfolios. If you're holding only ten or fifteen stocks, you need to know exactly what each one is doing with its cash. Lucas: Yeah. In a concentrated portfolio, cash drag is real. If one of your holdings has a giant cash pile earning nothing, that's a drag on your overall return. You have to decide whether you trust management to eventually use it wisely or whether you'd be better off owning a company that's more capital-efficient. Luna: So what's a practical step for someone listening right now? How should they look at a company's cash position? Lucas: I'd start by pulling the latest 10-Q or annual report. Look at the balance sheet under 'cash and cash equivalents' and 'short-term investments.' Then look at the cash flow statement and see how that number has changed over the last three to five years. If it's growing faster than net income, that's a yellow flag. Then check the management discussion — do they talk about a specific use for the cash? If it's just 'we maintain a strong liquidity position,' that's a polite way of saying they don't have a plan. Luna: And the opposite — if they say 'we are actively evaluating M&A opportunities' — that could be either good or bad, depending on their track record. Lucas: Right. Track record is everything. Berkshire's track record is excellent, but even Buffett says he's struggling to find deals. That tells you something about the market. On the other hand, a company like Microsoft has been very disciplined — they use cash for acquisitions like LinkedIn and Activision, and they've integrated them well. Their cash pile is actually shrinking relative to their size. Luna: So the listener's takeaway should be: don't ignore the cash. It's not just a boring line item. Lucas: Exactly. It's one of the most revealing things you can look at. And in a market where the S&P 500 is at 7,415 and everyone is focused on earnings growth, the cash pile is a quiet signal about management's confidence and capital allocation skill. That's exactly the kind of edge active investors need. Luna: Speaking of edges, this is exactly the kind of analysis we try to bring to every episode. And if you find value in these conversations, there's a simple way to support the show and keep it ad-free. Lucas: Yeah, listener support is what makes this possible. If you've ever gotten a useful idea from something we've discussed — like today's cash pile framework — you can chip in at buy me a coffee dot com slash fexingo. Luna: It's a small way to help us keep doing what we do, and we really appreciate it. Lucas: Alright, back to cash. I'd love to hear from listeners who have looked at a company's cash position and found something surprising. We might do a follow-up episode based on what you send in.