The U.S. equity markets shrugged off initial fears and scaled near record highs as Hurricane Irma had a lesser-than-expected impact on Florida and worries about another North Korea missile test by the weekend ebbed. As investors regained their appetite for riskier bets like equities, courtesy of strengthening dollar and sell-off in global bond markets, ‘cash cow’ stocks that offer higher returns have come to the forefront.
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 = 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.
Parameters Used for Screening
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 15 stocks that qualified the screen:
Texas Instruments Incorporated (TXN - Free Report) : Headquartered in Dallas, TX, Texas Instruments is an original equipment manufacturer of analog, mixed signal and digital signal processing integrated circuits. The company has a trailing four-quarter average earnings surprise of 8.4% and long-term earnings growth expectation of 9.6%. Texas Instruments carries a Zacks Rank #2.
CBRE Group, Inc. : Headquartered in Los Angeles, CBRE Group 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 in all major metropolitan areas across the globe. The company has a trailing four-quarter average earnings surprise of 18.7% and long-term earnings growth expectation of 13%. CBRE Group sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
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.
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 #1 stock has a trailing four-quarter average earnings surprise of 2.7% and long-term earnings growth projection of 17.1%.
Lloyds Banking Group plc (LYG - Free Report) : Headquartered in London, Lloyds Banking Group provides banking and financial services to individual and business customers in the U.K. and internationally. The company has 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.
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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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