The U.S. equity markets shrugged off resurgent coronavirus fears from the Delta variant and protracted economic recovery owing to mounting inflationary pressures with a string of upbeat earnings from blue-chip companies. The uptick in infections and imposition of fresh restrictions in several parts of Asia and Europe threatened to derail the global economic revival, spooking the 10-year U.S. Treasury yields. However, better-than-expected earnings performance from hitherto reported companies appeared to soothe investor nerves and spurred optimism about economic revival. This, in turn, triggered an amazing turnaround for the benchmark U.S. Treasury yield and put the markets back on the growth track.
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. Why ROE?
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 companies 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. Screening Parameters
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 22 stocks that qualified the screen: Best Buy Co., Inc. ( BBY Quick Quote BBY - Free Report) : Headquartered in Richfield, MN, Best Buy is a multinational specialty retailer of consumer electronics, home office products, entertainment software, communication, food preparation, wellness, heath, security, appliances and related services. The company operates in the United States and Canada. This Zacks #1 Ranked company has a long-term earnings growth expectation of 8.3%. The company delivered a trailing four-quarter earnings surprise of 32.1%, on average. KLA Corporation ( KLAC Quick Quote KLAC - Free Report) : San Jose, CA-based KLA Corporation is an original equipment manufacturer of process diagnostics and control equipment and yield management solutions required for the fabrication of semiconductor integrated circuits or chips. The company delivered a trailing four-quarter positive earnings surprise of 8.9%, on average, and has a long-term earnings growth expectation of 14%. KLA Corporation carries a Zacks Rank #2. You can see . the complete list of today’s Zacks #1 Rank stocks here Polaris Inc. ( PII Quick Quote PII - Free Report) : Headquartered in Medina, MN, Polaris designs, manufactures and markets power sports vehicles worldwide. It also produces replacement parts and accessories of such vehicles. The company delivered a trailing four-quarter earnings surprise of 53%, on average. This Zacks Rank #2 stock has a VGM Score of B. CDW Corporation ( CDW Quick Quote CDW - Free Report) : Headquartered in Vernon Hills, IL, CDW Corporation is a leading provider of integrated information technology solutions to small, medium and large business, government, education and healthcare customers in the United States, the United Kingdom and Canada. This Zacks #2 Ranked company has a long-term earnings growth expectation of 13.1% and a VGM Score of A. The company delivered a trailing four-quarter positive earnings surprise of 17.4%, on average. 3M Company ( MMM Quick Quote MMM - Free Report) : Headquartered in St. Paul, MN, and founded in 1902, 3M together with its subsidiaries operates as a diversified technology firm. The company delivered a trailing four-quarter earnings surprise of 9.9%, on average. This Zacks Rank #2 stock has a long-term earnings growth expectation of 9.5% and a VGM Score of B. 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.