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The Q2 earnings season is off to a flying start, courtesy of broad-based performance across most sectors. Although earnings growth is trending lower than in comparable periods, total earnings are likely to be on par or even better than the all-time high achieved in fourth-quarter 2016. It appears that the equity markets have dispelled the recent skepticism about President Trump’s ability to deliver on his pro-growth promises.     

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 garner 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 28 stocks that qualified the screen:

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 6.7% 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.

International Consolidated Airlines Group, S.A. (ICAGY - Free Report) : Based in Madrid, Spain, International Consolidated Airlines Group is one of the world's largest airline groups with 547 aircraft flying to 268 destinations, carrying more than 100 million passengers each year. It is reportedly the third largest group in Europe and the sixth largest in the world, based on revenues. This Zacks Rank #2 stock has a long-term earnings growth projection of 4.1%.

Sandvik AB (SDVKY - Free Report) : Headquartered in Stockholm, Sweden, Sandvik operates as a high-tech and global engineering firm in the field of rock excavation, metal-cutting, and materials technology. The company has a Zacks Rank #2 and a Value Growth Momentum Score (VGM Score) of ‘A’.

Applied Materials, Inc. (AMAT - Free Report) : Headquartered in Santa Clara, CA, Applied Materials offers manufacturing equipment, services, and software to the semiconductor, display, and related industries worldwide. This Zacks Rank #2 stock has a modest trailing four-quarter average earnings surprise of 3.4% and long-term earnings growth projection of 16.6%.

Pepsico, Inc. (PEP - Free Report) : Headquartered in Purchase, NY, PepsiCo is one of the leading global food and beverage companies. Its principal brands/businesses include: Frito-Lay snacks, Pepsi-Cola beverages, Gatorade sports drinks, Tropicana juices and Quaker foods. The company has a trailing four-quarter average earnings surprise of 5.2% and long-term earnings growth expectation of 7.4%. PepsiCo carries a Zacks Rank #2.

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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