(FORTUNE Magazine) – When it comes to researching stocks, numbers can be fickle. Revenues can dry up with the filing of a lawsuit. A sudden change in interest rates can turn healthy leverage into a crippling debt load. And profits, as we've learned all too well, can turn out to be so much accounting wizardry. But if there's one measure of financial well-being investors can more or less depend on, it's cold, hard cash.

Companies with piles of dough have the equivalent of a plan B. They can make acquisitions, take risks, sit out dry spells. The very presence of a healthy cash hoard indicates that a business has had some familiarity with success. Most important right now, perhaps, is the fact that a tendency toward stockpiling cash--rather than piling on debt--makes a company less vulnerable to the catastrophic collision of leverage and rising interest rates bound to affect many U.S. businesses over the next few years. "We're at levels [of debt] we've never seen before in this country--not just corporate but consumer leverage too," says Ed Choi, a portfolio manager at global investment management firm GMO. With borrowing historically cheap, the ratio of debt to sales for S&P 500 companies (excluding financials) increased 10% in 2003 alone, according to GMO.

Toss in the threat of terrorism and volatile oil prices, and the outlook for stocks is soaked in risk. Even worse, last year's rally absorbed most of the bargains, leaving today's investors with few prospects for sizable gains in sight.

Most brokers will tell you that risk is proportional to returns. That you have to stick your neck out to win big. But recently the folks at GMO took that conventional wisdom to task with a study that found "high quality" stocks--those with low leverage and low earnings volatility--outperformed not only riskier stocks over the past 23 years but also the market overall. And according to the study, high-quality stocks outperformed at the greatest rate--an average of 22%--in the two-year periods after the valuation of low-quality stocks peaked. Given last year's run-up in highly volatile stocks with questionable earnings, Choi says, the time for cash and quality is now. "It's boring, but boring wins in the long run."

Any discussion of cash, of course, must begin with Microsoft. The software behemoth is famously sitting on a war chest of more than $50 billion. The problem is that Microsoft--its days of hypergrowth in the past and its stock still trading at a pricey 39 times earnings--has long since been discovered. In June, Microsoft disclosed that it had recently held discussions about spending virtually all of its savings to buy German software maker SAP. (Which raises a good point: Just because a company has a lot of cash doesn't mean it will use it wisely.) Still, as a benchmark for financial health, Microsoft sets the bar high.

To find stocks that combine the balance-sheet security of Microsoft with better prospects for price appreciation, we enlisted Stern Stewart & Co., the consulting firm that created the financial performance measure economic value added (EVA), and asked them to screen for companies equally or less leveraged than the software maker. Using net debt divided by enterprise value, they found 146 companies in the Russell 3000 index (excluding financial firms). Next we asked them to take it a step further and search for low volatility, low risk, and high profitability. It so happens that Stern Stewart has been developing a tool that does just that.

Their performance-risk-valuation investment technology (PRVit) system creates an index of scores based on a formula that blends the firm's figures for each of the three metrics for any given company in the Russell 3000. It also accounts for risk factors like lease obligations, normally overlooked in standard valuations. The point of PRVit is to find stocks trading at a significant discount to their intrinsic value. In back testing, Stern Stewart found that the stocks identified as most attractive by the PRVit system beat the S&P 500 by roughly ten percentage points a year, on average, from 1996 through 2003. Stern Stewart researchers whittled the list of 146 stocks down to ten that they considered significantly undervalued. We then chose the three with the best mix of security and growth potential.

Our first pick is a little controversial. Some people, in fact, feel that small-appliance maker National Presto Industries (NPK, $39) has too much cash--namely, the SEC. The Investment Company Act of 1940 prohibits a company from holding more than 40% of assets in investments (even short-term vehicles), and the regulatory agency is taking the 99-year-old company to court. (The rule is designed to distinguish operating companies that make or sell things from money management firms.) The appliance maker, a small fry in terms of market cap, argues that it's merely exercising the necessary caution to stay afloat in a competitive industry.

So why bother with National Presto? For one thing, it harbors $196 million in cash against its $263 million market cap. And it has managed to be remarkably efficient. Presto has produced an astounding five-year average return on capital of 108%. "They are earning as high a return as any company in America," says Stern Stewart partner Bennett Stewart. Plus, over the past couple of years it has used its resources to acquire companies that make diapers (in constant demand) and ordnance for the U.S. military (which are in particular demand at the moment). And as we see it the worst-case scenario, should the SEC continue with its suit, is probably that National Presto will have to issue a shareholder dividend worth at least half the price of shares.

At Activision (ATVI, $16), the action is in its roster of hot videogames. The creator of hits like Call of Duty and Tony Hawk's Underground should get another big boost with the release of Spider-Man 2 on June 30, scheduled to coincide with the movie sequel. Activision has a premium P/E of 32. But its recently reported fiscal 2004 profits were up 26% over the previous year, and it should match that growth over the next 12 months. It also has over half a billion in cash on the books. Another positive: This month prices for the Xbox system dropped by $30, and PlayStation 2 is expected to match that decrease this summer, moves that usually result in increased game sales.

Missed any of the above? Well it's all backed up, probably on disks made by Imation (IMN, $41), a data-storage specialist that makes everything from high-capacity tape cartridges to rewritable CDs. The story of this 3M spinoff is one of masterful retreat in tough times. As the economy shrank post--tech bubble, Imation sold off ancillary units and refocused on its core business, reducing its capital in line with revenues. Imation has converted a zero return on invested capital in 2001 to a 5.6% return last year. And all the while it managed to sock away $416 million in the bank. "It's a pretty Steady Eddie growth business," says Daniel Renouard, an analyst at Baird Equity Research. "Stable, with a very strong cash flow." If new CEO Bruce Henderson maintains the company's record for cool-headedness, Imation should be just the kind of safe bet that investors ought to be making.