A better-than-expected first-quarter GDP estimate and U.S. dollar strength led the Fed Chair Janet Yellen to signal an imminent interest rate hike. However, a strengthening U.S. dollar might halt the bullish run of the S&P 500 as it could potentially impact the oil market and emerging market assets.
In such a topsy-turvy market, where money can play a key role in surviving carnage, investors look for ‘cash cow’ stocks to milk more cash or profits.
However, singling out cash-rich stocks alone does not make them a solid investment proposition unless they 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: The Time-Tested Variable
ROE = Net Income/Shareholders’ Equity
ROE helps investors distinguish between profit-generating companies from profit burners. In other words, this financial metric enables investors to identify those stocks that diligently deploy cash for higher investor returns instead of piling up the dry powder.
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 growing its profits without investing any new equity capital in the business and portrays management efficiency in rewarding shareholders with attractive risk-adjusted returns.
Screening Parameters to Rake Moolah
In order to shortlist stocks that are cash rich with high ROE, we added Cash Flow greater than $1 billion and ROE greater than X-Industry as our primary screening parameters. However, these are not the ultimate criteria for short listing stocks in a turbulent market. As such, we have added a few additional criteria to arrive at a winning strategy to mint money.
Price/Cash Flow less than X-Industry:This metric measures how much investors pay for one dollar 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 its assets, which include cash, accounts receivable, property, equipment, inventory and furniture. Of course, the higher the ROA, the better it is.
5 Year EPS Historical Growth greater than X-Industry:This criterion indicates that continued earnings momentum has translated to 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 5 of the 10 stocks that qualified the screening:
Altria Group, Inc. (MO)
Braskem S.A. (BAK)
Lear Corp. (LEA)
Electronic Arts Inc. (EA)
Shire plc (SHPG)
With an enviable cash pile, these stocks appear to be enterprising picks when they are blended with other attractive features like high ROE, high ROA and solid historical earnings growth along with a solid Zacks Rank.
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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