The U.S. equity markets picked up steam as both the United States and China appeared intent to strike a deal and pave the way for an earlier settlement of trade disputes. While the communist nation decided to exempt some goods from the tariff list, the Trump administration deferred the increased tariff rates on $250 billion worth of imports by two weeks. The two countries have also decided to hold meeting in October to reconcile their differences through negotiations. 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 11 stocks that qualified the screen:
KLA Corporation (KLAC - Free Report) : Headquartered in Milpitas, CA, KLA Corporation manufactures process control and yield management solutions for the semiconductor and related nanoelectronics industries worldwide. This Zacks #1 Ranked company delivered a trailing four-quarter average positive earnings surprise of 9.3%. You can see the complete list of today’s Zacks #1 Rank stocks here. It has a long-term earnings growth projection of 13.3%.
International Consolidated Airlines Group, S.A. (ICAGY - Free Report) : Based in Madrid, Spain, International Consolidated Airlines Group operates passenger and cargo transportation services in the United Kingdom, Spain, Ireland, the United States, and rest of the world. The company operates under the British Airways, Iberia, Vueling, LEVEL and Aer Lingus brands. This Zacks #1 Ranked firm delivered a trailing four-quarter average positive earnings surprise of 92.9%.
Biogen Inc. (BIIB - Free Report) : Based in Cambridge, MA, Biogen is one of the world’s leading biotechnology companies, which focuses on developing innovative therapies for treating serious neurological and neurodegenerative diseases. The company pulled off a trailing four-quarter average positive earnings surprise of 8.8%. It has a long-term earnings growth projection of 8.4%. Currently, it carries a Zacks Rank #2.
CDW Corporation (CDW - Free Report) : Headquartered in Vernon Hills, IL, CDW Corporation 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 United Kingdom and Canada. The company has a long-term earnings growth projection of 13.1%. It delivered a trailing four-quarter average positive earnings surprise of 8.9%. Currently, it carries a Zacks Rank #2.
CBRE Group, Inc. (CBRE - Free Report) : Headquartered in Los Angeles, CBRE Group is a commercial real estate services and investment firm, offering 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. It came up with a trailing four-quarter average positive earnings surprise of 12.5%. The company has a long-term earnings growth expectation of 11%. At present, CBRE Group 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.