The equity market witnessed a sharp fall on Nov 9 after the unexpected victory of Donald Trump as the president of the U.S. This sent shockwaves through industries far and wide, rattling the global markets on fears of changes in government policies. However, the markets made a dramatic rebound in the later part of the day on expectations of an economic stimulus that would boost hiring and corporate earnings while cutting taxes.
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 Used 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 take 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.
Here are five of the 16 stocks that qualified the screening:
Pepsico, Inc. (PEP - Free Report) : Headquartered in Purchase, NY, PepsiCo is one of the leading food and beverage companies of the world. Its principal brands/businesses include: Frito-Lay snacks, Pepsi-Cola beverages, Gatorade sports drinks, Tropicana juices and Quaker foods. This Zacks Rank #2 stock has a decent long-term earnings growth expectation of 7.6% and a modest trailing four-quarter average earnings surprise of 5.4%.
Citrix Systems, Inc. (CTXS - Free Report) : Headquartered in Fort Lauderdale, Citrix is a leading provider of virtualization, networking and cloud computing solutions to more than 230,000 organizations worldwide. This Zacks Rank #2 stock has a solid trailing four-quarter average earnings surprise of 25.1% and long-term earnings growth projection of 9.6%.
Braskem S.A. (BAK - Free Report) : Braskem is the leading thermoplastic resins (polyethylene, polypropylene and PVC) producer in the Americas and the largest producer of polypropylene in the U.S. This Zacks Rank #1 stock has a trailing four-quarter average earnings surprise of 105.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.
General Motors Company (GM - Free Report) : Detroit, MI-based General Motors is a leading global automotive manufacturer. The company filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code on Jun 1, 2009. Pursuant to this, the New GM was formed by acquiring most of the assets and assuming certain liabilities of the Old GM, and some of its direct and indirect subsidiaries. The company has a trailing four-quarter average earnings surprise of 19.7% and long-term earnings growth expectation of 8.9%. General Motors carries a Zacks Rank #2.
ConAgra Foods, Inc. (CAG - Free 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 projection 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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