The brutal market swoon has reminded us of an oft-repeated lesson: even the best companies can get swept up in a downdraft. This across-the-board selling, frequently the result of an economic slowdown, can end up revealing a clear chasm. On the one side are companies that would indeed run into trouble if sales fell and financial resources grew limited. On the other side of the ledger are companies that are so strong, so flush with cash, that even another dip back to recession couldn’t derail them. But because investors are also indiscriminately shedding these stocks, they’re presenting clear and compelling “buy” signals.

I’ve come across 12 stocks that simply can’t be ignored. They’re sitting on huge piles of net cash, while being prodigious producers of free cash flow. The market sell-off positions these companies to put their cash and cash flow to use. Whether it’s deal-making, stock buybacks, dividend hikes or simply investments in their business to pursue long-term growth, these companies can step on the gas while many others would need to retreat in an economic downturn.

 
You’ll recognize some of these names from my recent articles. For example, I recently suggested shares of Micron Technology (NYSE: MU) looked quite compelling and, though they have moved up more than 10% since then, they still look far too cheap by a variety of measures.

I also wrote about Analog Devices (NYSE: ADI) in August and noted the company has deployed its strong balance sheet on extensive research and development (R&D) spending, which has led to a great margin performance. I still like Micron and Analog Devices a lot.

#-ad_banner-#The balance-sheet surprise
It’s no surprise to see the big tech firms with very high cash levels. Firms such as Microsoft (Nasdaq: MSFT), Cisco Systems (Nasdaq: CSCO), Dell (Nasdaq: DELL) and CA (NYSE: CA) have always been highly debt-averse. They build cash hoards for a “rainy day,” but their rising cash levels are reaching levels for far beyond any conceivable rainy day. The high-cash level is partially attributable to tax exposure of foreign profits when they are repatriated, though currently contemplated legislation could lower the tax rate, setting the stage for a return of this cash to the United States.

But one company is not historically seen as a balance-sheet powerhouse, but has now come to dominate such cash-focused stock screens. I’m talking about GM (NYSE: GM), which rallied after its late 2010 IPO at $35 a share to almost $39, but has plunged since then and is now trading at about $22.70.

How deeply has GM fallen? The automaker carries more than $30 billion in net cash, not far from its entire stock market value. It’s as if investors were saying the company’s auto business is worth almost nothing. This is a company that still had $136 billion in sales in 2010 (down from $180 billion in 2007). Remarkably, GM was able to generate operating income of about $16.5 billion in 2010, which was 25% higher than the 2007 levels. So sure sales have fallen, but costs have fallen even more.

Yet the current economic slowdown has led investors to again fear a 2008-style meltdown, which as you probably know, didn’t play out so well for GM back then. Yet the eventual bankruptcy and IPO of GM created a new company with a sterling balance sheet. Right now, analysts expect GM to earn nearly $6 billion (or $4 a share) in 2011 and a similar amount in 2012. Let’s assume analysts are too optimistic and GM fails to make this money because the possible looming economic recession may take a big bite out of sales. Simply put, this company is not poised for trouble even if it doesn’t make any money in 2012. It’s only a matter of time, perhaps 2013 or 2014, when business fully rebounds and GM starts making more than $5 billion a year.

Make no mistake, real challenges have emerged for GM since the well-received IPO of last fall. It has become apparent the product-development process slowed to crawl during the financial difficulties of 2008 and 2009. So GM is only now making a big R&D push, which won’t bear tangible fruit for another 12-24 months. In addition, after a steady brain drain, the company’s management team has not been as impressive as the managers running Ford. GM has more work to do to build a top-notch team that really knows the auto business. Lastly, GM’s highly-profitable pick-up truck business doesn’t look so good right now, since the housing market is still on the ropes, leaving the hundreds of thousands of contractors employed by the construction industry with little reason to buy new trucks right now.

These challenges shouldn’t be overstated, however, and there’s little reason why GM should be valued at almost nothing, which is the case when you back out all that cash. When investors eventually look past the near-term economic headwinds, they’ll notice GM is one of the cheapest stocks on the market.

Risks to consider: GM and the other stocks I mentioned above are unlikely to rally quickly, because first investors will need to get a sense of how short- or long-lived any economic slowdown may be.

Action to Take –> In this unsteady it market, it pays to play defense. Focusing on companies with very strong balance sheets can provide investors with upside exposure in any market rally and downside protection in any further market weakness. As market-timing is nearly impossible, investors have a rare chance to buy these balance-sheet kings while they remain so cheap.