The U.S. equity markets hit record highs, shrugging off the panic triggered by the outbreak of coronavirus, which reportedly spread across continents affecting more than 24,000 people and killing nearly 500 in China alone. Buoyed by solid economic fundamentals, such as the expansion of the manufacturing sector, solid factory orders, healthy job market and robust consumer spending, leading benchmark indices witnessed a remarkable turnaround. The markets were further boosted as the People's Bank of China injected billions of yuans and proposed plans to halve tariffs on $75 billion worth of U.S. imports. Solid quarterly performance led by technology, energy, financials and healthcare sectors and political stability, driven by President Trump’s acquittal from the impeachment process were other catalysts.
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 15 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 positive earnings surprise of 1.1%, on average. It has a long-term earnings growth projection of 11.6%.
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 delivered a trailing four-quarter positive earnings surprise of 97.8%, on average. Currently, it carries a Zacks Rank #2. 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 fabrication of semiconductor, flat panel liquid crystal displays, and solar photovoltaic cells and modules. This Zacks #1 Ranked firm delivered a trailing four-quarter positive earnings surprise of 4.9%, on average. It has a long-term earnings growth projection of 8.2%.
Lam Research Corporation (LRCX - Free Report) : 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 positive earnings surprise of 6.8%. It has a long-term earnings growth projection of 17.7%, on average.
Delta Air Lines, Inc. (DAL - Free Report) : Based in Atlanta, GA, Delta Air Lines is a leading provider of scheduled air transportation for passengers and cargo throughout the United States and around the world. Delta offers service to more than 300 destinations in 50 countries across the globe, operating a fleet of more than 700 aircraft and serving nearly 200 million customers annually. This Zacks #1 Ranked firm delivered a trailing four-quarter positive earnings surprise of 8.2%, on average. It has a long-term earnings growth projection of 14%.
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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.