The U.S. equity markets gained momentum yesterday as leading benchmark indices hit record high on expectations of a Fed rate cut as early as this month. Despite the resumption of U.S.-China trade talks and a strong June jobs report, slower business investment and low inflation rates were cited as the primary reasons for Fed’s accommodative monetary policy. This, in turn, keeps intact broad-based Wall Street expectations of around three interest rate cuts this 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, singling out cash-rich stocks alone does 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 = 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 eight stocks that qualified the screen:
Stryker Corporation SYK: Headquartered in Kalamazoo, MI, Stryker is one of the world’s largest medical device companies operating in the global orthopedic market. This Zacks Rank #2 firm delivered a trailing four-quarter average positive earnings surprise of 1.5%, and has a long-term earnings growth projection of 10.1%.
T. Rowe Price Group, Inc. TROW: Founded in 1937 and headquartered in Baltimore, T. Rowe Price Group is a global investment management firm 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 #1 Ranked company delivered a trailing four-quarter average positive earnings surprise of 3.9%. It has a long-term earnings growth projection of 9%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Applied Materials, Inc. AMAT: Founded in 1967 and 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. The company has a long-term earnings growth expectation of 6.7%. It has a trailing four-quarter average positive earnings surprise of 3.3%. Applied Materials currently carries a Zacks Rank #2.
Fiat Chrysler Automobiles N.V. FCAU: Based in Cambridge, MA, Fiat Chrysler designs, manufactures and sells vehicles, components, and production systems. The company has a long-term earnings growth projection of 2.8%. Currently, it carries a Zacks Rank #2.
Northrop Grumman Corporation NOC: Based in Falls Church, VA, Northrop supplies 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. It came up with a trailing four-quarter average positive earnings surprise of 18.5%. The company has a long-term earnings growth expectation of 12.8%. At present, Northrop holds a Zacks Rank of 2.
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.
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Northrop Grumman Corporation (NOC) : Free Stock Analysis Report
Fiat Chrysler Automobiles N.V. (FCAU) : Free Stock Analysis Report
T. Rowe Price Group, Inc. (TROW) : Free Stock Analysis Report
Stryker Corporation (SYK) : Free Stock Analysis Report
Applied Materials, Inc. (AMAT) : Free Stock Analysis Report
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