Volatility persisted in the U.S. equity markets in 2018, with the year being dubbed the worst in a decade in terms of stock-market performance. While the Dow fell 5.6%, the S&P 500 Index and the Nasdaq Composite declined 6.2% and 3.9%, respectively. The intense market volatility was driven by a combination of several factors such as global economic slowdown, geopolitical concerns, monetary policy woes, inflation fears and uncertainties regarding increased regulation of the technology 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 lesser 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 eight 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 13.5% and long-term earnings growth expectation of 7.3%. Progressive currently has a Zacks Rank #2.
The Hershey Company (HSY - Free Report) : Based in Hershey, PA, Hershey is the largest chocolate manufacturer in North America as well as a global leader in chocolate and non-chocolate confectionery. This Zacks #2 Ranked stock has a long-term earnings growth expectation of 8.5%.
Lockheed Martin Corporation (LMT - Free Report) : Based in Bethesda, MD, Lockheed Martin Corporation is the largest defense contractor in the world. The company has a trailing four-quarter average positive earnings surprise of 13.9% and long-term earnings growth projection of 6%. Lockheed Martin has Zacks Rank #2, at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Facebook, Inc. (FB - Free Report) : Headquartered in Menlo Park, CA, Facebook Inc. helps in creating and fostering social networks through its web-based portal. It helps users exchange messages, post pictures, play social games, listen to music and interact with their favorite brands. The company has a trailing four-quarter average positive earnings surprise of 14.1% and long-term earnings growth expectation of 21.5%. Currently, Facebook carries a Zacks Rank #2.
General Motors Company (GM - Free Report) : Detroit, MI-based General Motors is a leading global automotive company, which is engaged in designing, building and selling cars, trucks, crossovers and automobile parts worldwide. This Zacks Rank #2 stock has a trailing four-quarter average positive earnings surprise of 21.8% and long-term earnings growth expectation of 8.5%.
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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.