The U.S. equity markets stumbled from record high territories on weaker-than-expected job growth in July and sparked fresh fears of intense market volatility on resurgence of coronavirus cases with the spread of the Delta variant. The latest jobs report from ADP revealed that private-sector businesses added 330,000 jobs in July compared to broad-based expectations of 683,000 additions, largely due to shortage of raw materials owing to supply chain disruptions. Inflationary pressures also continued to weigh on the relatively solid earnings performance. The uptick in infections and imposition of fresh restrictions in several parts of Asia and Europe further cast a shadow on the speedy economic recovery.
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 companies 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 22 stocks that qualified the screen:
NIKE, Inc. NKE: Headquartered in Beaverton, OR, NIKE is engaged in the business of designing, developing and marketing of athletic footwear, apparel, equipment and accessories, and services for men, women and children worldwide. It is the global leader in athletic footwear, apparel, equipment and sports-related accessories with operations in more than 160 countries. This Zacks #2 Ranked company has a long-term earnings growth expectation of 15.3%. The company delivered a trailing four-quarter earnings surprise of 56%, on average.
KLA Corporation KLAC: San Jose, CA-based KLA Corporation is an original equipment manufacturer of process diagnostics and control equipment and yield management solutions required for the fabrication of semiconductor integrated circuits or chips. The company delivered a trailing four-quarter earnings surprise of 7.9%, on average, and has a long-term earnings growth expectation of 14%. KLA Corporation carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Whirlpool Corporation WHR: Benton Harbor, MI-based Whirlpool is one of the largest manufacturers of home appliances in the world. The company manufactures products in 14 countries and markets products in nearly every country around the world. This Zacks #2 Ranked company has a long-term earnings growth expectation of 8.1%. The company delivered a trailing four-quarter earnings surprise of 29.8%, on average.
CBRE Group, Inc. CBRE: Headquartered in Dallas, TX, CBRE 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. With more than 100,000 employees the company serves clients in above 100 countries. This Zacks #1 Ranked company has a long-term earnings growth expectation of 11%. The company delivered a trailing four-quarter earnings surprise of 53.5%, on average.
Seagate Technology Holdings PLC STX: Headquartered at Dublin, Ireland, Seagate is the second-largest manufacturer of hard disk drives in the United States. The company delivered a trailing four-quarter earnings surprise of 11.4%, on average. This Zacks Rank #1 stock has a long-term earnings growth expectation of 1.2%.
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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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NIKE, Inc. (NKE) : Free Stock Analysis Report
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CBRE Group, Inc. (CBRE) : Free Stock Analysis Report
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