The equity markets continued to breathe easy as the U.S.-China trade concerns abated with President Trump pledging support for the beleaguered Chinese telecom firm, ZTE, and the Qualcomm-NXP merger review process getting a roll-on with urgency from the top administration of China. Although apprehensions related to the U.S. pullout from the Iran nuclear deal remained a subtle threat, overall markets appeared to be headed for a smooth sail.
As investors employ a wait-and-see approach in a classic example of “backing and filling” in the market, they could benefit from ‘cash cow’ stocks that garner higher returns.
However, singling out cash-rich stocks alone does not make for a solid investment proposition unless they are backed by attractive efficiency ratios like return on equity (ROE). A high ROE ensures that the company is reinvesting its cash at a high rate of return.
ROE: A Key Metric
ROE = Net Income/Shareholders’ Equity
ROE helps investors distinguish profit-generating companies from profit burners and is useful in determining the financial health of a company. In other words, this financial metric enables investors to identify stocks that diligently deploy cash for higher returns.
Moreover, ROE is often used to compare the profitability of a company with other firms in the industry — the higher, the better. It measures how well a company is multiplying its profits without investing new equity capital and portrays management’s efficiency in rewarding shareholders with attractive risk-adjusted returns.
Parameters Used for Screening
In order to shortlist stocks that are cash rich with high ROE, we have added Cash Flow greater than $1 billion and ROE more than X-Industry as our primary screening parameters. In addition, we have taken a few other criteria into consideration to arrive at a winning strategy.
Price/Cash Flow less than X-Industry: This metric measures how much investors pay for one dollar of free cash flow. A lower ratio indicates that investors need to pay less for a better cash flow generating stock.
Return on Assets (ROA) greater than X-Industry: This metric determines how much profit a company earns for every dollar of asset, which includes cash, accounts receivable, property, equipment, inventory and furniture. The higher the ROA, the better it is for the company.
5-Year EPS Historical Growth greater than X-Industry: This criterion indicates that continued earnings momentum has translated into solid cash strength.
Zacks Rank less than or equal to 2: Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform irrespective of the market environment.
Here are five of the 17 stocks that qualified the screen:
General Motors Company (NYSE:GM): Founded in 1908, Detroit, MI-based General Motors is a leading global automotive firm. The company is engaged in designing, building and selling cars, trucks, crossovers and automobile parts worldwide. The company has a trailing four-quarter average positive earnings surprise of 18.4% and long-term earnings growth expectation of 5.5%. General Motors currently carries a Zacks Rank #2.
Boston Scientific Corporation (NYSE:BSX): Headquartered in Natick, MA and founded in 1979, Boston Scientific manufactures medical devices and products used in various interventional medical specialties worldwide. The company currently has a Zacks Rank #2. It has a trailing four-quarter average positive earnings surprise of 2.4% and long-term earnings growth expectation of 10.1%.
Lam Research Corporation (NASDAQ:LRCX): Established in 1980 and headquartered in Fremont, CA, Lam Research supplies wafer fabrication equipment and services to the semiconductor industry. Its products are used by semiconductor manufacturers in front-end and WLP processes, creating memory, microprocessors and other logic integrated circuits for a broad range of electronic devices. The company has a trailing four-quarter average positive earnings surprise of 9.1% and long-term earnings growth expectation of 17.7%. Lam Research currently sports a Zacks Rank #1.
NRG Energy Inc (NYSE:NRG): NRG Energy is engaged in the production, sale and delivery of energy and energy products and services to residential, industrial and commercial consumers in major competitive power markets in the United States. It has financial and commercial headquarters in Princeton, NJ and operational headquarters in Houston, TX. This Zacks Rank #1 stock has a stellar trailing four-quarter average positive earnings surprise of 507.9%.
Celanese Corporation (NYSE:CE): Texas-based Celanese is a global hybrid chemical company with diverse products that rank either first or second in their respective markets, based on market share. This Zacks Rank #1 stock has a trailing four-quarter average positive earnings surprise of 7% and long-term earnings growth projection of 8.9%.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It’s easy to use. Everything is in plain language. And it’s very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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