The equity markets witnessed a sharp rally in the past couple of trading sessions as the July report on the consumer price index revealed a better-than-expected slowdown in rising commodity prices. While core inflation (excluding volatile food and energy prices) increased 5.9% annually, inflation climbed 8.5% in July compared with broader expectations of 6.1% and 8.7% rise, respectively. This seemed to soothe frayed investor nerves as it appeared that inflation was slowly running out of steam and largely buoyed the equity markets. This, in turn, will further force the Fed to take stock of its aggressive rate hike policy and the overall economic health ahead of its September policy meeting.
Investors also await clarity regarding the future interest rate path and its likely impact on the stock market with a probable easing of the monetary tightening if inflation data continues to cool off. The central bank had earlier offered a broad outline of its reduction in asset holdings for monetary tightening. The Fed intends to reduce Treasury holdings and mortgage-backed securities by $30 billion and $17.5 billion, respectively, from June and extend the tallies to $65 billion and $35 billion after three months.
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. Marriott International, Inc. MAR, Mastercard Incorporated MA, Builders FirstSource, Inc. BLDR, Rockwell Automation, Inc. ROK and ON Semiconductor Corporation ON are some of the stocks with high ROE to profit.
ROE: A Key Metric
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.
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 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 21 stocks that qualified the screen:
Marriott International, Inc.: Headquartered in Bethesda, MD, Marriott is a leading worldwide hospitality company focused on lodging management and franchising. It boasts a portfolio of more than 8,000 properties under 30 leading brands spanning 139 countries and territories.
Marriott delivered a trailing four-quarter earnings surprise of 36.2%, on average and has a long-term earnings growth expectation of 41.7%. It has a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Mastercard Incorporated: Headquartered in Purchase, NY, Mastercard is a leading global payment solutions company that provides an array of services in support of credit, debit, mobile, web-based and contactless payments and other related electronic payment programs to financial institutions and other entities.
The company has a long-term earnings growth expectation of 19.8% and delivered a trailing four-quarter earnings surprise of 12.9%, on average. Mastercard carries a Zacks Rank #2.
Builders FirstSource, Inc.: Based in Dallas, TX, Builders FirstSource is the largest supplier of building materials, manufactured components and construction services to professional homebuilders, sub-contractors, remodelers and consumers. The company operates in more than 565 locations in 42 states all over the United States.
Builders FirstSource carries a Zacks Rank #2. The company delivered a trailing four-quarter earnings surprise of 88.6%, on average.
Rockwell Automation, Inc.: Based in Milwaukee, WI, Rockwell Automation provides industrial automation and information solutions worldwide. The company has a wide network spanning more than 100 countries. The company operates manufacturing facilities in the United States and multiple other countries.
This Zacks #2 Ranked company delivered a trailing four-quarter earnings surprise of 0.5%, on average. Rockwell Automation has a long-term earnings growth expectation of 9.7%.
ON Semiconductor Corporation: Headquartered in Phoenix, AZ, ON Semiconductor is an original equipment manufacturer of a broad range of discrete and embedded semiconductor components. Its product line includes discretes, such as bipolar transistors, diodes, filters, FETs, rectifiers and thyristors.
The company has a long-term earnings growth expectation of 25.6% and delivered a trailing four-quarter earnings surprise of 14%, on average. ON Semiconductor 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.
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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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Mastercard Incorporated (MA) : Free Stock Analysis Report
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ON Semiconductor Corporation (ON) : Free Stock Analysis Report
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