A deadlock to pass the budget deal in the U.S. Senate led to a federal shutdown at midnight on Feb 8 with Senator Rand Paul repeatedly stalling proceedings. This brought into the fore partisan division and continued bickering within both the parties, closing non-essential government operations for the second time in less than a month.
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 = 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.
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 26 stocks that qualified the screen:
CBRE Group, Inc. (CBG - Free Report) : Headquartered in Los Angeles, CBRE Group is a commercial real estate services and investment firm. It offers 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 22.3% and long-term earnings growth expectation of 13%. CBRE Group carries a Zacks Rank #2.
Lockheed Martin Corporation (LMT - Free Report) : Headquartered in Bethesda, MD, Lockheed Martin is the largest defense contractor in the world. The company is principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. Lockheed Martin carries a Zacks Rank #2. The company has a trailing four-quarter average positive earnings surprise of 4.6% and long-term earnings growth expectation of 7.3%.
LyondellBasell Industries N.V. (LYB - Free Report) : Based in Rotterdam, the Netherlands, LyondellBasell is among the leading plastics, chemical and refining companies with operations across 18 countries. The company’s products are used across a bevy of industries including electronics, automotive parts, packaging, construction materials and biofuels. This Zacks Rank #1 stock has a trailing four-quarter average positive earnings surprise of 2.1% and long-term earnings growth projection of 9%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Applied Materials, Inc. (AMAT - Free Report) : Headquartered in Santa Clara, CA, Applied Materials is one of the world’s largest suppliers of equipment for the fabrication of semiconductor, flat panel liquid crystal displays, and solar photovoltaic cells and modules. The company also offers deployment and support services related to the equipment supplied. This Zacks Rank #2 stock has a trailing four-quarter average positive earnings surprise of 2.8% and long-term earnings growth projection of 12.7%.
Microsoft Corporation (MSFT - Free Report) : Redmond, Washington-based Microsoft is one of the largest broad-based technology providers in the world today. Although software is the most important revenue source, the company’s offerings include hardware and online services. Additionally, Microsoft offers support services in the form of consultation, training and certification of system integrators and developers. This Zacks Rank #2 stock has a trailing four-quarter average positive earnings surprise of 18% and long-term earnings growth projection of 11.9%.
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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