The U.S. equity markets remained highly volatile over the past week as yields from the treasury bonds inched up with solid macroeconomic fundamentals. Per the latest jobs report, unemployment rate declined to a 49-year low of 3.7%, fuelling speculations of a likely Fed hike later this year and up to four times in 2019. With the earnings season set to gradually pick up pace in the forthcoming weeks, the markets are anticipated to witness another round of volatility owing to lesser-than-expected performance from the banking sector.
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 these 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 $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 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 12 stocks that qualified the screen:
The Progressive Corporation (PGR - Free Report) : Based in Mayfield Village, OH, Progressive is one of the major auto insurers in the country. Founded in 1965, the company is a leading independent agency writer of private passenger auto coverage. It has a trailing four-quarter average positive earnings surprise of 9.2% and long-term earnings growth expectation of 7.3%. Progressive currently has a Zacks Rank #2.
Broadcom Inc. (AVGO - Free Report) : With dual headquarters in Yishun, Singapore and San Jose, CA, 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 Zacks Rank #2 along with a trailing four-quarter average positive earnings surprise of 2.3% and long-term earnings growth expectation of 13.3%.
Celanese Corporation (CE - Free Report) : 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. The company has a trailing four-quarter average positive earnings surprise of 11.5% and long-term earnings growth projection of 10%. Celanese sports Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
CBRE Group, Inc. (CBRE - 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 9.5% and long-term earnings growth expectation of 13%. CBRE Group carries a Zacks Rank #2.
Waste Management, Inc. (WM - Free Report) : Headquartered in Houston, TX, Waste Management is the largest provider of comprehensive waste management services in North America. This Zacks Rank #2 stock has a trailing four-quarter average positive earnings surprise of 3.9% and long-term earnings growth expectation 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.