The U.S. equity markets have witnessed intense volatility over the past couple of days with a mixed bag of quarterly performances from leading blue-chip companies. As the earnings season gradually picks up, investors will likely have a better picture about how the virus outbreak has dented the overall growth momentum of the economy. A few downbeat developments added to the cacophony, including lackluster U.S. consumer confidence data and lack of consensus regarding additional government stimulus for the pandemic. An estranged Sino-U.S. relationship that has ebbed on diplomatic ties has compounded the negative vibes, while rising cases of fresh coronavirus victims continue to dash hopes of early 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.
Why ROE?
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.
Screening Parameters
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:
Rockwell Automation (NYSE:ROK), Inc. ROK: Based in Milwaukee, WI, Rockwell provides industrial automation and information solutions worldwide. This Zacks #2 Ranked company has a VGM Score of B. The company has a trailing four-quarter earnings surprise of 10.6%, on average, and long-term earnings growth expectation of 5.4%
Best Buy Co (NYSE:BBY)., Inc. BBY: Incorporated in 1966 and headquartered in Richfield, MN, Best Buy is a multinational specialty retailer of consumer electronics, home office products, entertainment software, communication, food preparation, wellness, heath, security, appliances and related services. The company has a trailing four-quarter earnings surprise of 21.6%, on average. The Zacks Rank #2 company has long-term earnings growth expectation of 8.2%.
T. Rowe Price Group, Inc. TROW: Founded in 1937 and headquartered in Baltimore, T. Rowe is a global investment management organization 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. The company has a trailing four-quarter earnings surprise of 4.8%, on average. It has a long-term earnings growth projection of 7.3%. T. Rowe sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Cadence Design (NASDAQ:CDNS) Systems, Inc. CDNS: Based in San Jose, CA, Cadence Design offers software, hardware, services and reusable IC design blocks to electronic systems and semiconductor customers. This Zacks #2 Ranked firm has a trailing four-quarter earnings surprise of 11.5%, on average. It has a long-term earnings growth projection of 13.7%.
TD Ameritrade (NASDAQ:AMTD) Holding Corporation AMTD: Founded in 1971 in California and headquartered in Omaha, NV, TD Ameritrade provides securities brokerage services and technology-based financial services to retail investors, traders, and independent registered investment advisors in the United States. The company has a trailing four-quarter earnings surprise of 8%, on average. This Zacks Rank #1 company has long-term earnings growth expectation of 7.6%.
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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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Best Buy Co., Inc. (BBY): Free Stock Analysis Report
Rockwell Automation, Inc. (ROK): Free Stock Analysis Report
T. Rowe Price Group, Inc. (TROW): Free Stock Analysis Report
Cadence Design Systems, Inc. (CDNS): Free Stock Analysis Report
TD Ameritrade Holding Corporation (AMTD): Free Stock Analysis Report
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