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Tickers in this Article: LUV, HUM, GOOG, MSFT
Stocks that generate cash flows significantly greater than their reported earnings can potentially end up undervalued by the market. As well, stocks that are consistently able to produce large amounts of operating cash flow are arguably safer than those that don't, as having plenty of cash coming in the door each quarter makes it that much less likely that a company will run into trouble paying its bills. Therefore, sometimes the value of cash to a company never looks obvious until a business needs it most. It's only then that one realizes why the balance sheet should always come before the income statement in valuing a business.

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Don't Overpay for Cash
However, just because a company is cash rich doesn't mean it's a good investment. In fact, companies flush with cash can often have rich share prices. Google (Nasdaq:GOOG) is one such name. It's an excellent business with a dominant position in the tech space. Google is now a $170 billion company with nearly $36.6 billion in cash and short term investments. But shares currently fetch 20 times earnings. In addition, the company's free cash flow figure of $7.1 billion in 2010 values the company at 27 times free cash flow. Compare that with Microsoft (Nasdaq:MSFT), a $220 billion company churning out over $22.1 billion in free cash flow last year.

Cheap Cash Plays
Yet just as the market has enriched the share price of some cash rich stocks, it has also left some potential bargains in the wake. Southwest Airlines Co. (NYSE:LUV) is an $8.75 billion company with over $4.5 billion in cash and 3.4 billion in debt. Shares trade for 13 times current year's earnings. And the company has generated $1.1 billion in free cash flow a year in 2010.

Another interesting company is health insurance provider Humana (NYSE:HUM). All insurance companies are required to hold a required level of statutory cash, so you will find most well known insurance companies to have a net cash position. Nevertheless, Humana has over $8.6 billion in net cash against a $12.7 billion market cap. The shares trade for 10 times next year's earnings and generated over $1.2 billion in free cash flow in 2010.

Counting Cash
Cash always looks boring when it builds up and just sits there. Sure there is legitimate concern that cash rich companies can make poor investment decisions with the cash. But identify quality companies with loads of cash, and the upside optionality looks great. (For related reading, see Value Investing Using The Enterprise Multiple.)

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