The U.S. equity markets witnessed a sharp uptrend yesterday that partially reversed the decline of the past few trading sessions and five consecutive days of losses. The decline was triggered by the Fed’s third successive 75 basis point rate hike as it vowed to continue its aggressive stance to curb inflation. The Fed even indicated that it expects to bring the so-called terminal rate to 4.6% from the current range of 3-3.25%. The downslide was further compounded by the British pound hitting a three-decade low against the U.S. dollar as a slew of tax cuts per a new U.K. economic plan rattled the European markets.
With the Bank of England indicating that it would temporarily purchase long-term U.K. government pounds to arrest the dwindling currency, the pound has stabilized. The U.S. Treasury yields also retreated from their peak to script a mini turnaround for the domestic stock market. However, investors would await further clarity regarding the future interest rate path and its likely impact on the economy as concerns about recession refuse to abate. 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. The AES Corporation ( AES Quick Quote AES - Free Report) , PepsiCo, Inc. ( PEP Quick Quote PEP - Free Report) , Dillard's, Inc. ( DDS Quick Quote DDS - Free Report) , Suzano S.A. ( SUZ Quick Quote SUZ - Free Report) and Arch Capital Group Ltd. ( ACGL Quick Quote ACGL - Free Report) are some of the stocks with high ROE to profit from. 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 19 stocks that qualified the screen: AES Corporation: Arlington, VA-based AES Corporation, incorporated in 1981, is a global power company. The company’s businesses are spread across four continents in 14 countries. AES Corporation is leading the utility industry's transition to clean energy by investing in sustainable growth and innovative solutions. It delivered a trailing four-quarter earnings surprise of 4.2%, on average and has a long-term earnings growth expectation of 8.3%. Currently, AES Corporation has a Zacks Rank #2. You can see . the complete list of today’s Zacks #1 Rank stocks here PepsiCo: Headquartered in Purchase, NY, PepsiCo is one of the leading global food and beverage companies. Its complementary brands/businesses include Frito-Lay snacks, Pepsi-Cola beverages, Gatorade sports drinks, Tropicana juices and Quaker foods. The company serves customers in more than 200 countries and territories. The company has a long-term earnings growth expectation of 7.7% and delivered a trailing four-quarter earnings surprise of 3.8%, on average. Pepsi carries a Zacks Rank #2. Dillard's: Founded in 1938, Dillard's is a large departmental store chain featuring fashion apparel and home furnishings. Its merchandise mix consists of both branded and private-label items. The company’s strategy is to offer more fashion-forward and trendy products to attract customers. Dillard’s is benefiting from continued momentum in consumer demand and better inventory management. The company delivered a trailing four-quarter earnings surprise of 215%, on average. DDS sports a Zacks Rank #1. Suzano: Headquartered in Salvador, Brazil, Suzano produces and sells eucalyptus pulp and paper products. With more than 90 years of experience, this vertically integrated firm is one of the largest producers of paper and graphic products in South America. The company has a long-term earnings growth expectation of 9.3% and delivered a trailing four-quarter earnings surprise of 46.7%, on average. Suzano carries a Zacks Rank #2. Arch Capital: Established in 1995 and headquartered in Pembroke, Bermuda, Arch Capital offers insurance, reinsurance and mortgage insurance across the world. The company offers a full range of property, casualty and mortgage insurance and reinsurance lines, while focusing on writing specialty lines of insurance and reinsurance. Arch Capital has a long-term earnings growth expectation of 10% and delivered a trailing four-quarter earnings surprise of 33.6%, on average. ACGL sports a Zacks Rank #1. 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.