Cash will still be king

*This is not financial advice. All content should be considered opinionated. We are not responsible for any of your gains and losses. I am neither a licensed or registered financial expert. Please see a financial advisor before making investment decisions.

Photo by Erik Mclean on Unsplash

With the economy halted and many companies nearing bankruptcy as they failed to prepare for a black swan event like the coronavirus, times like this show why cash is king. Not only do you get a great buying opportunity for assets but they can help businesses withstand calamities during desperate times.

While many dividend investors are waking up and seeing their investments in Carnival Cruises, Delta Airlines, and other stocks that have sold off drastically, private equity firms and many big corporations that have tons of dry powder in their balance sheets are not only surviving these times but are also looking to take advantage of these times. For the energy sector, private equity firms and some oil and gas giants like Chevron are looking to take advantage of the massacre that happened in the oil fields. In the startup world, tech companies like Google and Apple are looking to acquire startups that have game-changing technologies at a cheaper price.

It's times like this that show that cash is king.

"Cash is king"

While many say that the Federal Reserve's huge balance sheet increase will create hyperinflation in the economy, some people argue against that. With high unemployment and lower commodity prices, inflation is highly unlikely as many businesses can't afford to increase prices. Because of that, businesses will either keep prices steady or decrease them to meet consumers' needs. 

With oil plunging drastically (and even reaching negative territory) lately, there clearly are signs of deflation in action. 

In times of deflation, it's not assets that are king, but cash. If prices go down, the value of the dollar increases. That's how cash becomes king in times of deflation. 

Other thoughts

It's really interesting to see many companies spend money on share buybacks and in the end, have all that shareholder value that they created get wiped out. Carnival Cruises and Boeing are two examples of companies that have spent a lot of their money on share buybacks and have market value vanish from beneath their feet as the economic halt sent them to critical condition. 

Recently on CNBC, a prominent investor by the name of Chamath Palihapitiya talked about why Apple shares have done tremendously and IBM shares didn't despite both companies spending a lot of money on share buybacks. Chamath said that because of Tim Cook's decision to stuff the balance sheets with cash, that's why investors were more optimistic on Apple than on IBM. He compared IBM's buyback plan as "using up their own oxygen" which made sense because they were spending a lot more on share buybacks than on investments, R&D, or even in a rainy day fund. 

With many companies cutting their dividends to preserve their balance sheets, I'm curious to see the valuations of those companies in the future. Will they be valued the same as before the coronavirus or will they start trading with lower valuations? If they start trading with higher valuations from now on, I'd be really surprised. 

Overall

With asset prices plunging and potential deflation affecting the economy, the time where cash becomes king is coming. In the stock market, the companies that fill their balance sheets with cash will be favored by investors and will be taking this crisis as an opportunity to take themselves to the next levels and use their resources to compound shareholder value. 

As they say, a crisis is when a person's true character comes out. For many companies, this crisis showed that they're really weaker. Those that have a lot of cash should take this as an opportunity to get assets for a cheaper price. Honestly, if I don't see Big Tech not taking advantage of this crisis, then I'm sure they're the right management that I'd want to invest in.