The U.S. equity markets has trended down in the past couple of trading days as high inflation rate fueled speculations that an overheating economy could prompt the Fed to rein in its monetary support. The central bank has indicated that interest rates could rise as early as 2023 with the economy getting faster on track for a healthy rebound, dropping wide hints that it is likely to consider tapering in the near future. Although the Fed has pledged to continue its bond buying program until the economy is ripe for a policy change, such indications have unnerved the market sentiments, triggering a downtrend.
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 = 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.
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 24 stocks that qualified the screen:
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 8.9%, on average. This Zacks Rank #2 company has a long-term earnings growth expectation of 14%.
Best Buy Co., Inc. BBY: 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 operates in the United States and Canada. This Zacks #2 Ranked company has a long-term earnings growth expectation of 8.3%. The company delivered a trailing four-quarter earnings surprise of 32.1%, on average.
Virtu Financial, Inc. VIRT: Headquartered in New York, NY, Virtu Financial is a market-leading financial services firm that leverages cutting-edge technology to provide execution services and data, analytics and connectivity products to its clients and deliver liquidity to the global markets. The company pulled off a trailing four-quarter earnings surprise of 30%, on average. Virtu Financial currently carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Polaris Inc. PII: Headquartered in Medina, MN, Polaris designs, manufactures and markets power sports vehicles worldwide. It also produces replacement parts and accessories of such vehicles. The company delivered a trailing four-quarter earnings surprise of 53%, on average. This Zacks Rank #2 stock has a VGM Score of A.
Lam Research Corporation LRCX: Headquartered in Fremont, CA, Lam Research supplies wafer fabrication equipment and services to the semiconductor industry. This Zacks #1 Ranked company has a long-term earnings growth expectation of 32.8%. The company pulled off a trailing four-quarter earnings surprise of 11.1%, on average.
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
Best Buy Co., Inc. (BBY) : Free Stock Analysis Report
KLA Corporation (KLAC) : Free Stock Analysis Report
Lam Research Corporation (LRCX) : Free Stock Analysis Report
Polaris Inc. (PII) : Free Stock Analysis Report
Virtu Financial, Inc. (VIRT) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research