5 Best ROE Stocks to Beat Earnings Blues

This earnings season is turning out to be not as bad as initially expected. Still, the earnings recession is likely to continue in Q1 with the S&P 500 expected to record its fourth successive quarterly decline in earnings. No matter the market reaction, it's always safer to bet on "cash cow" stocks - which as the name implies can be easily milked for more cash or profits with little expense involved.

These cash-rich stocks are usually mature companies with steady operations and require comparatively less capital investments than other players in the market. Consequently, these stocks are able to generate more free cash to boost shareholder returns. However, liquidity strength alone does not make cash-rich stocks a solid investment proposition, unless they are backed by attractive efficiency ratios like return on equity (ROE). A high ROE ensures whether a company is reinvesting its cash at a high rate of return.

ROE: A Game-Changing Financial Metric

ROE = Net Income/Shareholders' Equity

ROE separates the wheat from the chaff and 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.

Furthermore, 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.

The Winning Strategy

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, ROE is not an absolute indicator for short listing stocks in a turbulent market. As such, we have added a few additional criteria to arrive at a winning strategy.

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 16 stocks that qualified the screening:

Broadcom Limited ( AVGO )

Kellogg Company ( K )

Altria Group Inc. ( MO )

Gilead Sciences Inc. ( GILD )

Braskem S.A. ( BAK )

With an enviable cash pile, these stocks appear to be enterprising picks amid this Q1 earnings conundrum, 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.

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.

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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:

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BROADCOM LTD (AVGO): Free Stock Analysis Report

KELLOGG CO (K): Free Stock Analysis Report

GILEAD SCIENCES (GILD): Free Stock Analysis Report

BRASKEM SA (BAK): Free Stock Analysis Report

ALTRIA GROUP (MO): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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