The U.S. equity market continued its uptrend for the bulk of the past week as bilateral trade talks between the United States and China entered a decisive phase and inched closer to a landmark deal. With both sides showing efforts to resolve the trade differences and seeking to ink a formal agreement at a summit between the state heads later this month, the stock market euphoria is likely to continue in the near future.
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 thirteen stocks that qualified the screen:
Best Buy Co., Inc. (BBY - Free Report) : Incorporated in 1966 and headquartered in Richfield, MN, Best Buy is a multinational specialty retailer of consumer electronics, home office products, entertainment software, appliances and related services. This Zacks Rank #2 stock has a trailing four-quarter average positive earnings surprise of 11.6%, and long-term earnings growth expectation of 11%.
Celgene Corporation (CELG - Free Report) : Summit, NJ-based Celgene is a biopharmaceutical company focused on the discovery, development and commercialization of drugs targeting cancer and inflammatory diseases through next-generation solutions in protein homeostasis, immuno-oncology, epigenetic, immunology and neuro-inflammation. The stock has a long-term earnings growth expectation of 22% with a trailing four-quarter average positive earnings surprise of 2.7%. Celgene sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
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 20.5% and long-term earnings growth expectation of 8.5%.
Facebook, Inc. (FB - Free Report) : Headquartered in Menlo Park, CA, Facebook 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. This Zacks Rank #2 stock has a trailing four-quarter average positive earnings surprise of 13.5% and long-term earnings growth expectation of 22.6%.
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 6.4% and long-term earnings growth expectation of 11%. Currently, CBRE Group carries a Zacks Rank #2.
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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.