Encouraging labor market data and rising oil prices raise hopes of a rate hike this year, giving a fresh lease of life to the equity market that has been witnessing intense volatility of late. However, uncertainties related to the approaching presidential elections eclipse the prospects to some extent.
Amid such an equivocal scenario, investors are often on the lookout for ‘cash cow’ stocks that would enable them to rake in more profits.
However, singling out cash-rich stocks alone does not make them 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 Financial Metric
ROE = Net Income/Shareholders’ Equity
ROE helps investors distinguish between profit-generating companies from profit burners and is useful for 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 growing its profits without investing any new equity capital in the business and portrays management efficiency in rewarding shareholders with attractive risk-adjusted returns.
Parameters for Screening
In order to shortlist stocks that are cash rich with high ROE, we 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 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. Of course, the higher the ROA, the better it is.
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. You can see the complete list of today’s Zacks #1 Rank stocks here.
Here are 5 of the 13 stocks that qualified the screening:
Macy's, Inc. (M - Analyst Report) : Based in Cincinnati, OH, Macy’s is one of the leading department store retailers in the U.S., operating approximately 870 outlets under the names of Macy’s, Bloomingdale’s, Bloomingdale’s Outlet, Macy’s Backstage and Bluemercury. This Zacks Rank #2 stock has a decent long-term earnings growth expectation of 8.5% and a healthy trailing four-quarter average earnings surprise of 16.3%.
Discovery Communications, Inc. (DISCK - Snapshot Report) : Headquartered in Silver Spring, MD, this Zacks Rank #1 stock operates as a global media firm with 3 billion subscribers in more than 220 countries. Discovery Communications offers high-quality content through global brands like Discovery Channel, TLC, Investigation Discovery, Animal Planet and Discovery Science. The stock has a strong trailing four-quarter average earnings surprise of 16.3%.
Boston Scientific Corporation (BSX - Analyst Report) : Headquartered in Natick, MA, and founded in 1979, Boston Scientific manufactures medical devices and products used in various interventional medical specialties worldwide. This Zacks Rank #2 stock has a trailing four-quarter average earnings surprise of 6.3% and long-term earnings growth expectation of 11.2%.
Broadcom Limited (AVGO - Analyst Report) : Based in Singapore, Broadcom Limited is a premier designer, developer and global supplier of a broad range of analog semiconductor devices and digital, mixed-signal and optoelectronics components and subsystems. This Zacks Rank #1 stock has a trailing four-quarter average earnings surprise of 7% and long-term earnings growth expectation of 15%.
ConAgra Foods, Inc. (CAG - Analyst Report) : Omaha, NE-based ConAgra is one of the leading food companies in North America, serving grocery retailers, restaurants and other foodservice establishments. This Zacks Rank #2 stock has a trailing four-quarter average earnings surprise of 10.7% and long-term earnings growth expectation of 8.8%.
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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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