Investors have collectively forgotten... cash is king.
Think back to the boom of the dot-com mania.
You probably remember the chaos of that era. Waiters were quitting their jobs to trade stocks.
I was a tech analyst at the time. And people were accosting me at cocktail parties to pitch ideas.
Back then, I had a front-row seat of the bubble. I was working on a team that managed more than $14 billion for institutional clients and some of New York's wealthiest families.
And I had an unusual assignment. I needed to find tech stocks with enormous long-term potential... and spot the bad companies that had no business being listed on the market.
In other words, I had to find the likes of Google and Amazon – the real winners. But I also had to avoid companies that would lose everything.
Pets.com is one of the most famous examples of the latter...
The online pet-supply retailer never turned a profit. But when it went public, it raised a staggering $82.5 million. And it went out of business nine months later.
So, I followed my assignment. It all came down to looking at one thing – cash...
'Real Cash' Matters
Now companies often "hide" their real numbers. They use "financial engineering" to mislead the public.
When you look at a company's quarterly earnings report, it can be 100 pages long. And it's full of accounting gibberish... So it can be confusing.
But it turns out that you only need to know one thing – how much real cash the company produces.
For every dollar the company takes in, how much pure cash does it generate after paying off all its expenses?
Sometimes a big infusion of cash can come from a one-off event – like if Apple (AAPL) suddenly sold its entire iPad business, for example.
But that kind of cash flow isn't "repeatable." It gets included in earnings, but it's not going to happen again.
What you want is consistency.
You want a company converting almost 100% of its earnings into cash – what I call "cash conversion" – quarter after quarter.
You want that no matter what the company is selling – whether it's AI, gold, oil, medicine, clothing, and so on.
I'll also note that using this kind of metric made me very unpopular with certain company-management teams back in the '90s...
If I attended the lavish dinners they threw for wealthy investors, they would signal their bankers or PR folks to escort me out to the street – and close the door in my face.
Companies wanted to woo institutional investors like me because we had a lot of money to invest.
But in my case, I asked a lot of uncomfortable questions.
You see, I had developed a way to tell which of the high-flying stocks in a boom or a breakthrough sector had the potential to return hundreds of percent... survive the busts and all the subsequent bear markets... and become household names.
Meanwhile, I could also tell which stocks were doomed to crash and disappear.
And it was all based on that core concept – cash is king.
It was true in the '90s. And it's still true today.
Good investing,
Joe Austin
Editor's note: This coming Wednesday, June 25, Joe is joining Chaikin Analytics founder Marc Chaikin for a special event. During it, he'll discuss his "cash is king" concept in more detail. And he'll help Marc share the biggest breakthrough in the history of our firm.
In short, it's a new way to see which companies using AI and other tech innovations could double your money... before you get in.
