Equity markets across the globe fell sharply as the coronavirus pandemic wreaked havoc beyond the geographical territories of its country of origin and affected countless people in far-off places. The death toll has swelled to 2,465 worldwide so far, with 23 outside mainland China and 78,800 confirmed cases globally. With the communist government publicly admitting its failure to contain the spread of the virus, markets went on a tailspin fearing a global economic slowdown driven by the cascading effect of the deadly disease. Experts widely anticipate that global growth is likely to decelerate significantly in the first quarter of 2020 before making a probable turnaround in the remainder of the year.
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 17 stocks that qualified the screen:
CDW Corporation CDW: 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 delivered a trailing four-quarter positive earnings surprise of 8.3%, on average. It has a long-term earnings growth projection of 13.1%.
Sony Corporation SNE: 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: 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 5.9%, on average. 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 6.8%. It has a long-term earnings growth projection of 17.7%.
Delta Air Lines, Inc. DAL: 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 #2 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.
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Sony Corporation (SNE) : Free Stock Analysis Report
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