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Analyst Blog

The U.S. equity market clambered up last week as the Fed raised interest rates for the second time in three months. However, the exuberance fizzled out as a token rate hike was already factored into the decision making.

As investors employ a wait-and-see approach in a classic example of “backing and filling” in the market, they could benefit from ‘cash cow’ stocks that rake in higher returns.

However, singling out cash-rich stocks alone does not make for 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 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 increasing its profits without investing new equity capital in the business and portrays management 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 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. 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 20 stocks that qualified the screen:

Conagra Brands, Inc. (CAG - Free Report) : Chicago-based Conagra is one of the leading branded food firms of North America. The company offers premium edible products, with refined focus on innovation. This Zacks Rank #2 stock has a trailing four-quarter average earnings surprise of 13.3% and long-term earnings growth expectation of 8%.

Broadcom Limited (AVGO - Free Report) : Broadcom is a premier designer, developer and global supplier of a broad range of semiconductor devices with a focus on complex digital and mixed signal complementary metal oxide semiconductor based devices and analog III-V based products. The company has a trailing four-quarter average earnings surprise of 5.9% and long-term earnings growth expectation of 13.6%. Broadcom carries a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Deere & Company (DE - Free Report) : Founded in 1837, IL-based Deere is engaged in the production and distribution of agricultural and forestry equipment, construction equipment and engines worldwide. This Zacks Rank #2 stock has modest long-term earnings growth expectation of 7.6% with a stellar trailing four-quarter average earnings surprise of 60.5%.

Electronic Arts Inc. (EA - Free Report) : Headquartered in Redwood City, CA, Electronic Arts develops games, content and services for consoles, personal computers, mobile phones, and tablets worldwide. This Zacks Rank #2 stock has a solid trailing four-quarter average earnings surprise of 32.9% and long-term earnings growth projection of 16.1%.

CBRE Group, Inc. (CBG - Free Report) : Headquartered in Los Angeles, 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 across all major metropolitan areas worldwide. This Zacks Rank #1 stock has a trailing four-quarter average earnings surprise of 8.2% and long-term earnings growth projection of 12.5%.

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.

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