Are companies that are spending a good investment?

Associated Press

NEW YORK

It’s not easy being the most optimistic guy in the room.

Most companies are hoarding cash after two-plus years of cost-cutting. The members of the benchmark Standard & Poor’s 500 index are sitting on a record $960 billion in cash on their balance sheets. All told, companies now have more than 10 percent more cash than the previous peak in 2004. Though the days of mass layoffs and eking out another year from ever-older computers might be largely over, few companies are expanding.

But there are exceptions, those companies that are bold — or some might say, crazy — enough to invest for the next boom while others remain cautious.

Caterpillar Inc., Union Pacific Corp. and Google Inc. each have announced major plans to hire new workers or build new factories. Despite recent signs that the economy is slowing, none of them have said that they intend to back off.

So should investors make a bet on a company that’s expanding when others are still playing defense?

A handful of academics, analysts and fund managers say yes. They say that despite the gloomy reports, companies that are hoarding cash will be left behind when the economy hits its next major growth stage. These companies won’t have the people or projects in place to cash in on new business opportunities.

“If you’re not using your cash, you’re going to be less competitive in the future,” says Eric Marshall, the director of research at Hodges Capital, an investment advisory firm in Dallas that has $800 million in assets under management. He says that there was a time after the financial crisis that sitting on cash made sense because of concerns that the recession would be prolonged. “But now the risks have changed,” he says. He thinks that the economy’s recent stall will be a temporary one.

Marshall points to Cummins Inc., one of his firm’s long-standing holdings. In 2007, the company had about a 20 percent share of the heavy-duty truck-engine market. It continued to reinvest during the downturn — $752 million in 2009-10, more than it spent in 2006-07 — and spent more money on things such as research and expandingcapacity. One result: technology the company developed allowed its engines to meet more stringent environmental standards at a lower cost than its competitors, a fact not lost on investors.

Today, largely based on the success of its fuel-efficient engines and because it spent on technology when others didn’t, Cummins owns 40 percent of the heavy-duty truck market. Its stock, in turn, is up more than 180 percent — or nearly tripling — over the past two years.