President Donald Trump's pro-growth agenda, centered on his 'phenomenal' tax cut plans, have reinvigorated the equity markets that had taken a serious beating owing to the proposed ban on immigration from seven Muslim-majority countries. The tax overhaul is likely to place the economy on the faster growth track although the trade and healthcare proposals are expected to add to the uncertainty.
Amid such an equivocal scenario, investors are often on the lookout for 'cash cow' stocks that will enable them to rake in 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: A Key Metric
ROE = Net Income/Shareholders' Equity
ROE helps investors distinguish between profit-generating companies from profit burners and is useful for 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 increasing its profits without investing new equity capital in the business and portrays management 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 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 16 stocks that qualified the screen:
Conagra Brands, Inc.CAG : Chicago-based Conagra is one of the leading branded food firms of North America. The company offers premium edible products, with refined focus on innovation. This Zacks Rank #2 stock has a trailing four-quarter average earnings surprise of 13.3% and long-term earnings growth expectation of 8%.
General Motors CompanyGM : Detroit, MI-based General Motors is a leading global automotive manufacturer. The company filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code on Jun 1, 2009. Pursuant to this, the New GM was formed by acquiring most of the assets and assuming certain liabilities of the Old GM as well as some of its direct and indirect subsidiaries. The company has a trailing four-quarter average earnings surprise of 19.7% and long-term earnings growth expectation of 9.4%. General Motors carries a Zacks Rank #2.
Texas Instruments IncorporatedTXN : Headquartered in Dallas, TX, Texas Instruments, Inc. is an original equipment manufacturer of analog, mixed signal and digital signal processing integrated circuits. The stock has modest long-term earnings growth expectation of 9.6%. Campbell sports a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here .
Monsanto CompanyMON : MO-based Monsanto is a leading global provider of agricultural products. This Zacks Rank #2 stock has a trailing four-quarter average earnings surprise of 309.7%.
Celanese CorporationCE : TX-based Celanese is a global hybrid chemical company that produces chemical substances and materials. This Zacks Rank #2 stock has a trailing four-quarter average earnings surprise of 6.8% and long-term earnings growth projection of 8.8%.
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.