The U.S. equity markets extended their recent bull run as the Trump administration dropped its plans to impose 5% tariff on all Mexican goods amid row over migration deal. With the Mexican government promising to step up measures in order to stem the flow of illegal immigrants to the United States, the markets received a shot in the arm as trade concerns between the two neighboring countries abated. However, the Sino-U.S. trade war continued to brew with no visible respite in the near term as both countries remained firm in their positions.
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, 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 19 stocks that qualified the screen:
CDW Corporation (CDW - Free Report) : Headquartered in Vernon Hills, IL, CDW is a leading provider of integrated information technology solutions to small, medium and large business, government, education and healthcare customers in the United States, the U.K. and Canada. This Zacks Rank #2 firm delivered a trailing four-quarter average positive earnings surprise of 8.9%.
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, it sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Celgene Corporation (CELG - Free Report) : Summit, NJ-based Celgene is a biopharmaceutical firm 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 company has a long-term earnings growth expectation of 22.2%, with a trailing four-quarter average positive earnings surprise of 2.6%. Celgene currently carries a Zacks Rank #2.
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%.
Northrop Grumman Corporation (NOC - Free Report) : Based in Falls Church, VA, Northrop supplies a broad array of products and services to the U.S. Department of Defense, including electronic systems, information technology, aircraft, space technology and systems integration services. It came up with a trailing four-quarter average positive earnings surprise of 18.5%. The company has a long-term earnings growth expectation of 12.8%. At present, Northrop holds 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.