Investors don’t often worry about whether a large-cap company will continue its operations into the foreseeable future, unless some surprisingly negative event just occurred.
Small-cap companies, however, are not as reliable. Depending on the age of the company, its earnings and its cash flows, some investors may doubt the viability of a smaller company.
So how can you tell which are here to stay? One idea is to compare a company’s cash holdings to its operating expenses. Companies with high levels of cash relative to average quarterly operating expenses can continue to fund their operations even without profitability for an extended period of time.
To get an idea of what the market thinks, it’s also helpful to consider institutional and insider buying trends. Companies seeing significant net buying from institutional investors (such as hedge fund managers and mutual fund managers) and company insiders (such as members of the company’s board and upper management) have the faith of “smart money” investors.
Business Section: Investing Ideas
To illustrate these ideas, we ran a screen on stocks with high cash and short-term investments relative to their average quarterly operating expenses over the last year.
We then screened for those with the highest net institutional buying over the current quarter, as well as the highest net insider buying over the last six months.
Do you think these companies will be able to operate indefinitely? Use this list as a starting point for your own analysis.
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