The U.S. equity markets witnessed a roller-coaster ride and snapped the three-day losing streak by recording a sharp rebound as the one-again-off-again “Phase One” deal seemed to back on track. After the decline, which was triggered by President Trump’s remarks that there was no specific deadline for the ongoing trade negotiations, the markets rebounded as media reports confirmed that the partial trade accord was around the corner. However, intense volatility, which has been the hallmark of the stock market in recent times due to the fluid nature of the prolonged negotiation process, continues to keep investors on edge.
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 do 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: A Key Metric
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.
Parameters used for Screening
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 12 stocks that qualified the screen:
KLA Corporation KLAC: San Jose, CA-based KLA Corporation is an original equipment manufacturer of process diagnostics and control equipment and yield management solutions required for the fabrication of semiconductor integrated circuits or chips. This Zacks #2 Ranked company delivered a trailing four-quarter average positive earnings surprise of 9.5%. It has a long-term earnings growth projection of 11.8%.
Sony Corporation : Headquartered in Tokyo, Japan, Sony designs, manufactures and sells several consumer and industrial electronic equipment. The company’s product roster comprises audio and video equipment, televisions, displays, semiconductors, electronic components, gaming consoles, computers and computer peripherals and telecommunication equipment. The company has a long-term earnings growth projection of 7.7%. It delivered a trailing four-quarter average positive earnings surprise of 86.9%. Currently, it sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Applied Materials, Inc. AMAT: Headquartered in Santa Clara, CA, Applied Materials is one of the world’s largest suppliers of equipment for the fabrication of semiconductor, flat panel liquid crystal displays, and solar photovoltaic cells and modules. This Zacks #1 Ranked firm delivered a trailing four-quarter average positive earnings surprise of 4.9%. It has a long-term earnings growth projection of 8.2%.
Stryker Corporation SYK: Headquartered in Kalamazoo, MI, Stryker operates as a medical technology company. This Zacks #2 Ranked firm delivered a trailing four-quarter average positive earnings surprise of 1.5%. It has a long-term earnings growth projection of 9.9%.
Lam Research Corporation LRCX: Established in 1980 and headquartered in Fremont, CA, the company supplies wafer fabrication equipment and services to the semiconductor industry. This Zacks #2 Ranked firm delivered a trailing four-quarter average positive earnings surprise of 6.9%. It has a long-term earnings growth projection of 13.6%.
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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.