The U.S. equity market lost its winning streak over the past week as inflation hit its highest point in more than 30 years, with the consumer price index up 6.2% year over year in October – the most since December 1990. The stock market rally, which was perhaps fueled by a healthy corporate earnings season and the Fed tapering decision amid the backdrop of an improving economy, was snapped by high prices of essential consumer items. Although the inflationary pressure is widely viewed as temporary and largely induced by pandemic-specific issues, it continued to reverberate through markets and might force the Fed to kick start the tapering more quickly than it had signaled. Nevertheless, secular growth drivers are expected to fuel growth in the long term.
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 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. 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 18 stocks that qualified the screen: Seagate Technology Holdings PLC ( STX Quick Quote STX - Free Report) : Headquartered in Dublin, Ireland, Seagate is the second-largest manufacturer of hard disk drives in the United States. This Zacks #2 Ranked company has a long-term earnings growth expectation of 1.2%. Seagate delivered a trailing four-quarter earnings surprise of 11.3%, on average. 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, health, security, appliances, and related services. Best Buy delivered a trailing four-quarter earnings surprise of 31.9%, on average. This Zacks #2 Ranked company has a long-term earnings growth expectation of 7.6%. 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 earnings surprise of 6.5%, on average, and has a long-term earnings growth expectation of 16.2%. KLA Corporation carries a Zacks Rank #2. You can see . the complete list of today’s Zacks #1 Rank stocks here CBRE Group, Inc. ( CBRE Quick Quote CBRE - Free Report) : Headquartered in Dallas, TX, CBRE 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. With more than 100,000 employees, the company serves clients in above 100 countries. This Zacks #2 Ranked company has a long-term earnings growth expectation of 11%. CBRE delivered a trailing four-quarter earnings surprise of 41%, on average. Rockwell Automation, Inc. ( ROK Quick Quote ROK - Free Report) : Based in Milwaukee, WI, Rockwell provides industrial automation and information solutions worldwide with a wide network spanning more than 100 countries. ROK delivered a trailing four-quarter earnings surprise of 13.8%, on average. This Zacks Rank #2 stock has a long-term earnings growth expectation of 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. 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.