LOOKING at how the financial crisis has evolved so far, it is perhaps a given that it will take quite some time before market sentiment begins to improve. Most houses seem to be in consensus that the markets will take an upswing only towards the second half of 2009.

But don't throw caution to the wind by buying into cheap but risky stocks. Yes, valuations are cheap now and some would say that buying stocks, rather than selling, should be the logical way to go.

But it is best to be cautious when you are buying into the market right now. You do not want to buy into a cheap but ticking time bomb, saddled by its own debts. What is more ideal is to buy into cash-rich companies as much as possible, especially those which are trading at net cash.

Let us take a look at cash-rich stocks among the blue chips and S-chips, and analyse whether it is worthwhile to invest in them.

Blue chips with net cash positions

The Straits Times Index (STI) has some of these cash-rich gems lurking among the hundreds of stocks listed on the exchange. We are not only talking about the small caps here, as some of these companies with net cash positions are blue chips like Singapore Press Holdings (SPH), Venture Corp, Singapore Airlines (SIA) and Sembcorp Marine. All of them have been hit over the past year to the extent where some of their net cash to market capitalisation ratios have peaked.

Given the tight credit crunch and worsening economic outlook, those companies with strong balance sheets would be the ones most likely to ride out this recession, which is expected to last for another two quarters at the very least.

As Janice Chua of DBS Vickers puts it in a strategy piece published at the beginning of this year: 'Faced with deteriorating demand outlook and tight credit, companies with strong balance sheets have the tenacity to ride out this recession. Small caps are more vulnerable and we would prefer blue chips with strong cash flow, net cash positions, and sustainable dividend payout ratios.'

Indeed, blue-chip companies with net cash positions are the ones which are tipped to survive this down-cycle. These large caps have the buying power to make acquisitions of smaller companies should they become available and attractive enough.

Further, these cash-rich blue-chip companies will be more likely to sustain their dividend policies, compared to their counterparts with net debt positions. This will in turn send a strong signal to the market about the strength and resilience of the company during this crisis.

Take Venture Corp, for example. In the latest report for financial year 2008, it had more than $192 million of net cash in its balance sheet or about 70 cents net cash per share.

The company was able to sustain its dividend policy for the latest financial year, given its respectable results. Its decision to declare a 50 cent dividend during its release of FY2008 results on Feb 19 was cheered by the investing community. In less than a week, its share price surged almost 20 per cent to $5. So, yes, cash-rich blue chips do have these advantages - but only if the cash is really there.

After the recent Satyam saga in India, investors worldwide have been extremely cautious when buying into attractively priced companies sitting on a huge pile of cash. They simply want to be absolutely certain that the cash is indeed there, to be seen and touched.

S-chips trading below cash per share - are they for real?

Another group of stocks which have seen valuations dive to an unprecedented level are the S-chips. Take a closer look at this group of stocks and you will realise that many of them are trading at net cash value, where the stock price is equal to the net cash per share of the company. Simply put, one who invests in the company is literally getting the company and its operations for free.

Some stocks which are trading at or below net cash per share include China Hong- Xing, C & G Industrial, Cacola and Li Heng. But are these net cash stocks too good to be true?

The argument to invest in S-chips trading at net cash or less is a more complex one. Tarred by corporate governance issues over the past few years, the locally-listed Chinese stocks are under a lot of scrutiny.

Think China Aviation Oil and China Print and, most recently, FibreChem. All these incidents have cast a pall over the accountability and corporate governance of these Chinese companies.

The ongoing investigation at FibreChem only further worsens the already bad sentiment over these S-chips. Since the onset of the FibreChem investigations, S-chips across the board have been badly beaten down.

China HongXing, in particular, is one of the most badly affected. There were already questions among investors on why the management failed to declare dividends when they announced their earnings on Feb 17.

This despite having a massive net cash sum of nearly 2 billion yuan (S$445 million) on its balance sheet or 17 cents net cash per share. Its share price tumbled further a few days later with the development at Fibrechem, where there were doubts over the group's receivables and cash balances.

Indeed, these are some transparency and accountability risks that investors should think about when investing in S-chips. We have seen enough examples to know what will become of the stock if some of these risks do indeed materialise. Think China Print.

On the flip side, the S-chip valuations are certainly very cheap, especially those trading below net cash value. So if you are very confident about the management of the company and think that the present dirt-cheap valuations compensate for all the foreseeable risks that you are undertaking, then you might consider making them a small part of your portfolio.

As always, however, caveat emptor.