The U.S. equity markets continued to be in the red for the second day on the trot as bilateral trade talks with China fell flat, risking the likelihood of a fresh tariff regime from the later half of the week. The nine-month old trade war that disrupted supply chains and weighed on the world economy is expected to aggravate further as the Trump administration is set to increase tariff on $200 billion worth of Chinese imports from 10% to 25%. Additional tariffs on $325 billion worth of imports from the Communist nation are also on the anvil.
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 24 stocks that qualified the screen:
Lockheed Martin Corporation (LMT - Free Report) : Incorporated in 1995 and headquartered in Bethesda, MD, Lockheed Martin is the largest defense contractor in the world. Its main areas of focus are defense, space, intelligence, homeland security and information technology including cybersecurity. This Zacks Rank #2 company delivered a trailing four-quarter average positive earnings surprise of 17.4%. It has a long-term earnings growth projection of 7%.
Bristol-Myers Squibb Company (BMY - Free Report) : New York-based Bristol-Myers Squibb is a global specialty biopharmaceutical firm focused on the development of treatments targeting serious diseases. The company pulled off a trailing four-quarter average positive earnings surprise of 11.9%. It has a long-term earnings growth projection of 5.1%. Currently, Bristol-Myers Squibb carries a Zacks Rank #2.
Sysco Corporation (SYY - Free Report) : Headquartered in Houston, TX and formed in 1969, Sysco markets and distributes a range of food and related products primarily to the foodservice or food-away-from-home industry. The company has a long-term earnings growth expectation of 10.3%, with a trailing four-quarter average positive earnings surprise of 4%. Sysco currently carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
PepsiCo, Inc. (PEP - Free Report) : Headquartered in Purchase, NY, PepsiCo is one of the leading global food and beverage companies. Its complementary brands/businesses include Frito-Lay snacks, Pepsi-Cola beverages, Gatorade sports drinks, Tropicana juices and Quaker foods. This Zacks #2 Ranked company delivered a trailing four-quarter average positive earnings surprise of 3.5%. It has a long-term earnings growth projection of 7.2%.
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 came up with a trailing four-quarter average positive earnings surprise of 6%. The company has a long-term earnings growth expectation of 7.3%. Progressive currently carries a Zacks Rank of 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.