After another volatile week, leading benchmark indices fell sharply as markets feared a second wave of coronavirus with the re-opening of the economy adding to the risks. With relaxation in various restrictions, the virus is likely to resurface, leading to probable severe lockdown controls thereafter. The drop in indices largely spooked investors as most have been pinning hopes on consumer resilience in the domestic market. Furthermore, this sent a shockwave across markets that until now appeared to have factored in the element of uncertainty regarding the quantum of economic damage from the virus outbreak.
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 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 four of the eight stocks that qualified the screen:
Seagate Technology PLC (STX - Free Report) : Headquartered at Dublin, Ireland, Seagate is the second-largest manufacturer of hard disk drives in the United States. This Zacks #2 Ranked company has a trailing four-quarter positive earnings surprise of 4.2%, on average.
CommScope Holding Company, Inc. (COMM - Free Report) : Headquartered in Hickory, NC, CommScope is a premier provider of infrastructure solutions, including wireless and fiber optic solutions, for the core, access and edge layers of communication networks. The company has a trailing four-quarter positive earnings surprise of 30.3%, on average. With long-term earnings growth expectations of 2.7%, it carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
T. Rowe Price Group, Inc. (TROW - Free Report) : Founded in 1937 and headquartered in Baltimore, T. Rowe is a global investment management organization that provides a broad array of mutual funds, sub-advisory services and separate account management for individual and institutional investors, retirement plans and financial intermediaries. This Zacks #2 Ranked firm has a trailing four-quarter positive earnings surprise of 4.8%, on average. It has a long-term earnings growth projection of 9.3%.
The Allstate Corporation (ALL - Free Report) : Founded in 1931 and headquartered in Northbrook, IL, Allstate is the third-largest property-casualty insurer and the largest publicly-held personal lines carrier in the United States. This Zacks #2 Ranked firm has a trailing four-quarter positive earnings surprise of 18.5%, on average. It has a long-term earnings growth projection of 7.5%.
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.