The Q3 earnings season is approaching its end, with over 327 S&P 500 companies releasing results till Nov 1, 2017. Although earnings growth is trending lower than in comparable periods, the dollar amount of total earnings is on track to reach an all-time quarterly high.
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. Why ROE? ROE = Net Income/Shareholders’ Equity ROE helps investors distinguish profit-generating companies from profit burners and is useful in 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 multiplying its profits without investing new equity capital and portrays management’s efficiency in rewarding shareholders with attractive risk-adjusted returns. Parameters Used for Screening Stocks 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 17 stocks that qualified the screen: Monsanto Company MON: Missouri-based Monsanto is a leading global provider of agricultural products. The company has a stellar trailing four-quarter average positive earnings surprise of 244.8% and long-term earnings growth expectation of 12.1%. Monsanto carries a Zacks Rank #2. CBRE Group, Inc. CBG: 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 positive earnings surprise of 18.7% and long-term earnings growth expectation of 13%. CBRE Group carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here. Pepsico, Inc. PEP: Headquartered in Purchase, NY, Pepsico is one of the leading global food and beverage companies with premier brands like Frito-Lay snacks, Pepsi-Cola beverages, Gatorade sports drinks, Tropicana juices and Quaker foods. The company has a Zacks Rank #2. Pepsico has a trailing four-quarter average positive earnings surprise of 4.7% and long-term earnings growth expectation of 7.1%. Applied Materials, Inc. ( AMAT Quick Quote 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 company has a trailing four-quarter average positive earnings surprise of 2.7% and long-term earnings growth projection of 17.1%. Celanese Corporation CE: Texas-based Celanese is a global hybrid chemical company with diverse products that rank either first or second in their respective markets, based on market share. This Zacks Rank #2 company has a trailing four-quarter average positive earnings surprise of 2.5% and long-term earnings growth projection of 9%.
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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 Zacks Restaurant Recommendations: Inaddition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »