The broader equity markets witnessed a healthy uptrend over this week, buoyed by an AI-infused rally and declining oil prices. Chip stocks led the gains, extending the market's winning streak for three consecutive trading days following a blockbuster IPO by AI firm Anthropic. The rally soothed frayed investor nerves regarding the sustainability of AI infrastructure investments. Crude oil prices declined as Iran's top leadership showed interest in ending the lingering conflict with the United States, further propelling the markets. 
  
The rally was also helped by the Federal Reserve's decision to keep interest rates unchanged as it aimed to focus on “price stability” amid stable economic growth and solid labor market conditions. As investors employ a wait-and-see approach in a classic example of “backing and filling” in the market, they can benefit from “cash cow” stocks that garner higher returns. However, identifying cash-rich stocks alone does not make for a solid investment proposition unless it is backed by attractive efficiency ratios, such as return on equity (ROE). A high ROE ensures that the company is reinvesting cash at a high rate of return. Micron Technology, Inc. (MU Quick QuoteMU - Free Report) , TE Connectivity plc (TEL Quick QuoteTEL - Free Report) , Arista Networks, Inc. (ANET Quick QuoteANET - Free Report) , VICI Properties Inc. (VICI Quick QuoteVICI - Free Report) and United Rentals, Inc. (URI Quick QuoteURI - Free Report) are some of the stocks with high ROE to profit from.

ROE: A Key Metric

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 companies 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.

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 $1 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 assets, 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 screening:

Micron: Headquartered in Idaho, Micron is one of the leading providers of semiconductor memory solutions. It manufactures and markets high-performance memory and storage technologies, including Dynamic Random Access Memory (DRAM), NAND flash memory, NOR Flash and other technologies. Its solutions are used in leading-edge computing, consumer, networking, mobile, automotive, industrial and data center products.

The company has a long-term earnings growth expectation of 32.6%. It delivered a trailing four-quarter earnings surprise of 21%, on average. It has a VGM Score of A. Micron sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here. 

TE Connectivity: Based in Galway, Ireland, TE Connectivity is a global technology company that designs and manufactures connectivity and sensor solutions for a wide range of industries, including automotive, aerospace, defense, energy and medical. With operations in more than 130 countries, TE Connectivity focuses on emerging technologies such as 5G, electric vehicles, industrial automation and smart cities to position itself at the forefront of connectivity advancements. 

The company has a long-term earnings growth expectation of 13%. It has a VGM Score of A and delivered a trailing four-quarter earnings surprise of 3.3%, on average. TE Connectivity carries a Zacks Rank #2.
    
Arista: Santa Clara, CA-based Arista is engaged in providing cloud networking solutions for data centers and cloud computing environments. The company holds a leadership position in 100-gigabit Ethernet switching for the high-speed datacenter segment. It is increasingly gaining market traction in 200- and 400-gig high-performance switching products and remains well-positioned for healthy growth in the data-driven cloud networking business with proactive platforms and predictive operations. 

The company has a long-term earnings growth expectation of 22.7%. It delivered a trailing four-quarter earnings surprise of 8.9%, on average. Arista carries a Zacks Rank #2. 
   
VICI: New York-based VICI is an experiential real estate investment trust (REIT) that owns and acquires gaming, hospitality, wellness, entertainment and leisure destinations. The company is a Maryland corporation and an internally managed REIT for U.S. federal income tax purposes.  

VICI carries a Zacks Rank #2. 
 
United Rentals: Based in Stamford, CT, URI rentals is the largest equipment rental company across the globe. URI’s principal products and services are equipment rental, sale of rental equipment, new equipment, contractor supplies, services and others.

The company has a long-term earnings growth expectation of 13.9% and delivered a trailing four-quarter earnings surprise of 5.7%, on average. It has a VGM Score of B.