With the coronavirus pandemic spooking financial markets in one of the worst declines in the recent past, evoking bitter memories of the 2008 market crash, U.S. lawmakers have decided to rise above their political differences to seek an economic stimulus package. The Senate is reportedly inching toward a $2 trillion rescue package deal to revive the economy. The market sprang to its feet on the news with the Dow soaring 2,111 points or 11.4% for its biggest one-day percentage gain since 1933.
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, identifying cash-rich stocks alone does not make for a solid investment proposition unless it is 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 13 stocks that qualified the screen:
CDW Corporation (CDW - Free Report) : Headquartered in Vernon Hills, IL, and founded in 1984, 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, United Kingdom and Canada. This Zacks #2 Ranked company has a trailing four-quarter positive earnings surprise of 8.3% on average. It has a long-term earnings growth projection of 13.1%.
Seagate Technology PLC (STX - Free Report) : Headquartered at Dublin, Ireland, Seagate is the second-largest manufacturer of hard disk drives in the United States. The company also develops other electronic data storage products such as solid-state drive and solid-state hybrid drives. The company has a trailing four-quarter positive earnings surprise of 6.2%, 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 #2 Ranked firm has a trailing four-quarter positive earnings surprise of 5.9%, on average. It has a long-term earnings growth projection of 9.9%.
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 has a trailing four-quarter average positive earnings surprise of 6.8%. It has a long-term earnings growth projection of 17.7%.
Stryker Corporation (SYK - Free Report) : Headquartered in Kalamazoo, MI, Stryker is one of the world’s largest medical device companies operating in the global orthopedic market. This Zacks #2 Ranked firm has a trailing four-quarter positive earnings surprise of 1.5%, on average. It has a long-term earnings growth projection of 10.1%.
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.
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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.