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The estranged relationship between the United States and China was further strained as Washington refuted Beijing’s claims to offshore resources in the South China Sea. This marked a dramatic shift in policy by the Trump administration that hitherto refrained from taking any sides in territorial disputes in the region. This, in turn, evoked a sharp response from the communist nation and could potentially lead to a flare-up with widespread ramifications. To add to the woes, a sudden rise in coronavirus cases throttled California’s reopening plans and rattled markets, sparking fears of a fresh wave of infections. A ripple effect across global markets sent shockwaves among investors, who until now appeared to have factored in the element of uncertainty regarding the quantum of economic damage from the pandemic.
As investors employ a wait-and-see approach in a classic example of “backing and filling” in the market, they can benefit from ‘cash cow’ stocks that garner higher returns. However, identifying cash-rich stocks alone does not make for a solid investment proposition unless it is backed by attractive efficiency ratios like return on equity (ROE). A high ROE ensures that the company is reinvesting 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 greater 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 lesser than X-Industry: This metric measures how much investors pay for $1 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:
Rockwell Automation, Inc. (ROK - Free Report) : Based in Milwaukee, WI, Rockwell provides industrial automation and information solutions worldwide. This Zacks #2 Ranked company has a VGM Score of A. The company has a trailing four-quarter positive earnings surprise of 10.6%, on average, and long-term earnings growth expectations of 5.4%
CBRE Group, Inc. (CBRE - Free Report) : Headquartered in Los Angeles, CBRE Group is a commercial real estate services and investment firm, offering a wide range of services to tenants, owners, lenders and investors in office, retail, industrial, multi-family and other types of commercial real estates in all major metropolitan areas across the globe. The company has a trailing four-quarter positive earnings surprise of 2.7%, on average. With long-term earnings growth expectations of 11%, it carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
T. Rowe Price Group, Inc. (TROW - Free Report) : Founded in 1937 and headquartered in Baltimore, T. Rowe is a global investment management organization that provides a broad array of mutual funds, sub-advisory services and separate account management for individual and institutional investors, retirement plans and financial intermediaries. This Zacks #1 Ranked firm has a trailing four-quarter positive earnings surprise of 4.8%, on average. It has a long-term earnings growth projection of 9.3%.
Waste Management, Inc. (WM - Free Report) : Headquartered in Houston, TX, Waste Management is a leading provider of comprehensive waste management services in North America, offering collection, transfer, recycling and resource recovery as well as disposal services to residential, commercial, industrial and municipal customers. This Zacks #2 Ranked firm has a trailing four-quarter positive earnings surprise of 2%, on average. It has a long-term earnings growth projection of 5.7%.
TD Ameritrade Holding Corporation (AMTD - Free Report) : Founded in 1971 in California and headquartered in Omaha, NV, TD Ameritrade provides securities brokerage services and technology-based financial services to retail investors, traders, and independent registered investment advisors in the United States. The company has a trailing four-quarter positive earnings surprise of 2.3%, on average. This Zacks Rank #1 company has long-term earnings growth expectation of 7.6%.
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.
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5 ROE Picks Amid Rising Sino-American & Coronavirus Tensions
The estranged relationship between the United States and China was further strained as Washington refuted Beijing’s claims to offshore resources in the South China Sea. This marked a dramatic shift in policy by the Trump administration that hitherto refrained from taking any sides in territorial disputes in the region. This, in turn, evoked a sharp response from the communist nation and could potentially lead to a flare-up with widespread ramifications. To add to the woes, a sudden rise in coronavirus cases throttled California’s reopening plans and rattled markets, sparking fears of a fresh wave of infections. A ripple effect across global markets sent shockwaves among investors, who until now appeared to have factored in the element of uncertainty regarding the quantum of economic damage from the pandemic.
As investors employ a wait-and-see approach in a classic example of “backing and filling” in the market, they can benefit from ‘cash cow’ stocks that garner higher returns. However, identifying cash-rich stocks alone does not make for a solid investment proposition unless it is backed by attractive efficiency ratios like return on equity (ROE). A high ROE ensures that the company is reinvesting 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 greater 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 lesser than X-Industry: This metric measures how much investors pay for $1 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:
Rockwell Automation, Inc. (ROK - Free Report) : Based in Milwaukee, WI, Rockwell provides industrial automation and information solutions worldwide. This Zacks #2 Ranked company has a VGM Score of A. The company has a trailing four-quarter positive earnings surprise of 10.6%, on average, and long-term earnings growth expectations of 5.4%
CBRE Group, Inc. (CBRE - Free Report) : Headquartered in Los Angeles, CBRE Group is a commercial real estate services and investment firm, offering a wide range of services to tenants, owners, lenders and investors in office, retail, industrial, multi-family and other types of commercial real estates in all major metropolitan areas across the globe. The company has a trailing four-quarter positive earnings surprise of 2.7%, on average. With long-term earnings growth expectations of 11%, it carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
T. Rowe Price Group, Inc. (TROW - Free Report) : Founded in 1937 and headquartered in Baltimore, T. Rowe is a global investment management organization that provides a broad array of mutual funds, sub-advisory services and separate account management for individual and institutional investors, retirement plans and financial intermediaries. This Zacks #1 Ranked firm has a trailing four-quarter positive earnings surprise of 4.8%, on average. It has a long-term earnings growth projection of 9.3%.
Waste Management, Inc. (WM - Free Report) : Headquartered in Houston, TX, Waste Management is a leading provider of comprehensive waste management services in North America, offering collection, transfer, recycling and resource recovery as well as disposal services to residential, commercial, industrial and municipal customers. This Zacks #2 Ranked firm has a trailing four-quarter positive earnings surprise of 2%, on average. It has a long-term earnings growth projection of 5.7%.
TD Ameritrade Holding Corporation (AMTD - Free Report) : Founded in 1971 in California and headquartered in Omaha, NV, TD Ameritrade provides securities brokerage services and technology-based financial services to retail investors, traders, and independent registered investment advisors in the United States. The company has a trailing four-quarter positive earnings surprise of 2.3%, on average. This Zacks Rank #1 company has long-term earnings growth expectation of 7.6%.
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.
Click here to sign up for a free trial to the Research Wizard today.
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.