The U.S. equity markets welcomed 2018 on a strong note as the Dow broke the historic milestone of 25,000 for the first time, while other leading benchmark indices scaled record highs on solid economic data across the globe. The stock market euphoria is likely to extend further on the corporate tax overhaul and relatively healthy job data.
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As investors employ a wait-and-see approach in a classic example of "backing and filling" in the market, they could benefit from 'cash cow' stocks that garner higher returns.
However, singling out cash-rich stocks alone does not make for 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 = 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 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 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 15 stocks that qualified the screen:
Waste Management, Inc. (NYSE: WM ): Headquartered in Houston, TX, Waste Management is the largest provider of comprehensive waste management services in North America. The company provides collection, transfer, recycling and resource recovery, as well as disposal services to nearly 20 million residential, commercial, industrial and municipal customers.
It is also a leading developer, operator and owner of waste-to-energy and landfill gas-to-energy facilities in the United States. The company has a modest long-term earnings growth expectation of 9.6%. Waste Management carries a Zacks Rank #2.
You can see the complete list of today's Zacks #1 Rank stocks here .
Applied Materials, Inc. (NASDAQ: AMAT ): Headquartered in Santa Clara, CA, Applied Materials is one of the world's largest suppliers of equipment for the fabrication of semiconductor, flat panel liquid crystal displays, and solar photovoltaic cells and modules.
The company also offers deployment and support services related to the equipment supplied. This Zacks Rank #1 company has a trailing four-quarter average positive earnings surprise of 2.8% and long-term earnings growth projection of 12.7%.
AMC Networks Inc (NASDAQ: AMCX ): Headquartered in NY, New York, AMC Networks is engaged in producing programming and movie content. It also owns and operates various cable televisions. This Zacks Rank #2 company has a trailing four-quarter average positive earnings surprise of 21.9% and long-term earnings growth projection of 7.6%.
Microchip Technology Inc. (NASDAQ: MCHP ): Incorporated in Delaware in 1989, Microchip develops and manufacturers microcontrollers, memory and analog and interface products for embedded control systems, which are small, low-power computers designed to perform specific tasks.
The company has a Zacks Rank #2. Microchip has a trailing four-quarter average positive earnings surprise of 9.3% and long-term earnings growth expectation of 12.2%.
Hershey Co (NYSE: HSY ): Based in Hershey, PA, Hershey is the largest chocolate manufacturer in North America as well as a global leader in chocolate and non-chocolate confectionery. In addition, Hershey manufactures pantry items like baking ingredients, toppings and beverages; and gum and mint refreshment products; snack bites and mixes, as well as spreads.
The company has a trailing four-quarter average positive earnings surprise of 9% and long-term earnings growth expectation of 7.7%. Hershey carries a Zacks Rank #2.
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.
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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.