The U.S. equity markets continued to be highly volatile as President Trump flip-flopped on the trade war and appeared intent to strike a deal, following reportedly similar interests from China. The on-again-off-again trade war skirmishes sent confusing signals to the market that bore the brunt of the geopolitical crisis and its cascading effect on the bilateral trade. 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: 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 10 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 #2 Ranked company delivered a trailing four-quarter average positive earnings surprise of 1.7%. It has a long-term earnings growth projection of 10%.
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 6%. It has a long-term earnings growth projection of 8.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Biogen Inc. BIIB: Based in Cambridge, MA, Biogen is one of the world’s leading biotechnology companies, which focuses on developing innovative therapies for treating serious neurological and neurodegenerative diseases. The company pulled off a trailing four-quarter average positive earnings surprise of 8.8%. It has a long-term earnings growth projection of 8.4%. Currently, it carries a Zacks Rank #2.
CDW Corporation CDW: Headquartered in Vernon Hills, IL, CDW Corporation is a leading provider of integrated information technology solutions to small, medium and large business, government, education and healthcare customers in the United States, the United Kingdom and Canada. The company has a long-term earnings growth projection of 13.1%. It delivered a trailing four-quarter average positive earnings surprise of 8.9%. Currently, it carries a Zacks Rank #2.
CBRE Group, Inc. CBRE: Headquartered in Los Angeles, CBRE Group is a commercial real estate services and investment firm, offering a wide range of services to tenants, owners, lenders and investors in office, retail, industrial, multi-family and other types of commercial real estates in all major metropolitan areas across the globe. It came up with a trailing four-quarter average positive earnings surprise of 12.5%. The company has a long-term earnings growth expectation of 11%. At present, CBRE Group holds a Zacks Rank of 2.
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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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