The equity markets welcomed the decade with a roller-coaster ride as the initial rally driven by the “Phase One” trade deal between the United States and China was overshadowed by escalating tensions in the Middle East. With President Trump vowing to retaliate against any action of hostility by Iran and its allies against the United States, oil prices are expected to witness high volatility, likely fuelling further unpredictability in the market. A healthy U.S. economy and solid labor market, however, are likely to offer some cushion against the consequent uncertainties.
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 17 stocks that qualified the screen:
ViacomCBS Inc. (VIAC - Free Report) : Based in New York, NY, ViacomCBS is a leading media and entertainment firm operating primarily in the United States, Europe, Latin America and Asia. This Zacks #2 Ranked company delivered a trailing four-quarter average positive earnings surprise of 1.1%. It has a long-term earnings growth projection of 11.3%.
Sony Corporation (SNE - Free Report) : 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 - Free Report) : 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%.
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 11.5%. The company has a long-term earnings growth expectation of 11%. At present, CBRE Group holds a Zacks Rank of 2.
Northrop Grumman Corporation (NOC - Free Report) : Based in Falls Church, VA, Northrop Grumman is a premier security firm, offering 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. This Zacks #2 Ranked firm delivered a trailing four-quarter average positive earnings surprise of 11.5%. It has a long-term earnings growth projection of 13.1%.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
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.