As various states prepare to ease the lockdown restrictions and seek to resume normalcy with President Trump proclaiming that the country has passed the ‘coronavirus peak’, equity markets appear to be taking a turn for the better. Investors are pinning hopes on possibilities of consumer resilience in the domestic market with the economies reopening soon. With one of the worst declines in the financial markets in the recent memory being probably behind us, the markets seem primed for the ongoing earnings season. At the same time, the markets appear to have factored in the element of uncertainty regarding the quantum of economic damage from the virus outbreak as it looks to rebuild.
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: 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 three stocks that qualified the screen:
Kinross Gold Corporation KGC: Based in Ontario, Canada, Kinross Gold is primarily involved in the exploration and operation of gold mines. This Zacks #2 Ranked company has a stellar trailing four-quarter positive earnings surprise of 182.5%, on average.
Stora Enso Oyj SEOAY: Headquartered in Helsinki, Finland, Stora Enso Oyj provides renewable solutions for the packaging, biomaterials, wooden constructions, and paper industries worldwide. The company has an astounding trailing four-quarter positive earnings surprise of 315%, on average. Currently, it carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Progressive Corporation PGR: Based in Mayfield Village, OH, The Progressive is one of the major auto insurers in the United States. This Zacks #2 Ranked firm has a trailing four-quarter positive earnings surprise of 15.6%, on average. It has a long-term earnings growth projection of 7.3%.
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.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Kinross Gold Corporation (KGC) : Free Stock Analysis Report
The Progressive Corporation (PGR) : Free Stock Analysis Report
Stora Enso Oyj (SEOAY) : Free Stock Analysis Report
To read this article on Zacks.com click here.