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FORTUNE.COM // NOVEMBER 2019
WHEN CASH
CUSHIONS
YOUR FALL
THE CURRENT BULL MARKET in stocks is several months past its 10th
birthday, and prognosticators have been predicting its demise for
at least half its life. You can hardly blame them for being early:
Historically, the average bull market has lasted less than five years.
But warnings of an imminent recession—which would be the
first since the 2007-09 financial crisis—are finally beginning
to drown out the party tunes. The United Nations Conference
(Unctad)on Trade and Development recently reported that 2019
would generate the weakest year of expansion in the global econo-
my since 2009. A global recession in 2020 has become a “clear and
present danger,” Unctad warned, citing the U.S.-China trade war,
high corporate debt, and the threat of a no-deal Brexit as drags on
growth. (There’s also the risk that America’s consumers will lose
their own bullishness; for more, see our story in this issue.)
Where should investors turn if a slowing economy drags stocks
down with it? One rule of thumb applies across industries: Cash is
king. Companies with larger-than-average cash reserves and strong
free cash flow (a measure of profitability) are better equipped than
their competitors to ride out a re-
cession. And investors reward them
accordingly, boosting their shares
even as their rivals flounder.
A big cash stockpile may sound
like a purely defensive asset—a
rainy-day fund to tap if a recession
eats into profits. But prodigious re-
serves can help a company continue
building for the future even when
its profits wobble. Cash hoards can
help management stay commit-
ted to long-term investments
like research and development,
acquisitions, and capital spending,
preventing those priorities from
falling victim to a slowdown.
Some savvy investors are well
aware of this phenomenon—and
research suggests that cash giants
get a share-price bump well before
a recession begins. Robert Nason
and Pankaj Patel, professors at Con-
cordia and Villanova universities,
respectively, recently studied the
performance of more than 1,700
publicly held U.S. manufacturing
firms (essentially, any company that
made anything tangible, whether
it’s airplanes, leather belts, or
CPUs) beginning in 2004—more
than three years before the Great
Recession started. They ranked
each company based on the size of
Cash-rich companies tend to
ride out recessions better than their
rivals —and the best time to buy shares
is well before a downturn begins.
By Ryan Derousseau
INVEST
ILLUSTRATION BY CHRIS GASH
