Broader stock markets headed north yesterday as investors shrugged off concerns about escalating geopolitical tensions over the war between Russia and Ukraine and invested heavily in cyclical stocks poised to benefit from a booming economy. Despite Russian President Putin sharpening his war rhetoric with a veiled nuclear threat after outgoing President Biden approved the use of US-made missiles against Russia, investors have been snapping up stocks seen as the likely beneficiaries of the Trump trade. However, the ongoing geopolitical turmoil in the Middle East remains a latent threat, driving market uncertainty and a volatility battle.
As investors take a wait-and-see approach in a classic example of ‘support and fill’ in the market, they can benefit from ‘cash cow’ stocks that deliver higher returns. However, identifying cash-rich stocks alone does not provide a solid investment proposition unless it is backed by attractive efficiency ratios such as return on equity (ROE). A high ROE ensures that the company reinvests cash at a high rate of return. The Walt Disney Company DIS, Leidos Holdings, Inc. LDOS and Regions financial company RF are some of the high ROE stocks to take advantage of.
ROE = Net Income/Equity
ROE helps investors distinguish profit-generating companies from profit-burners and is useful in determining a company’s financial health. In other words, this financial metric allows investors to identify companies that are diligently deploying cash for higher returns.
Furthermore, ROE is often used to compare a company’s profitability with that of other companies in the industry: the higher, the better. It measures how well a company multiplies profits without investing new equity and provides a picture of management’s efficiency in rewarding shareholders with attractive risk-adjusted returns.
To shortlist stocks that are cash rich and have high returns on equity, we have added this Cash flow greater than $1 billion And ROE greater than X-Industry as our primary screening parameters. We also considered a number of other criteria to arrive at a winning strategy.
Price/cash flow lower 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 stocks that generate better cash flow.
Return on Assets (ROA) greater than X-Industry: This metric determines how much profit a company earns for each dollar of assets, including cash, accounts receivable, real estate, equipment, inventory and furniture. The higher the ROA, the better it is for the company.
Historical growth over 5 years greater than X-Industry: This criterion indicates that continued earnings momentum has translated into a solid cash position.
Zacks Rank less than or equal to 2: Zacks stocks rated #1 (Strong Buy) or 2 (Buy) are known to outperform regardless of the market environment.
Here are three of the seven stocks that qualified for the screening:
Walt Disney: Burbank, CA-based Walt Disney has assets that include films, television shows and theme parks. This leading diversified international family entertainment and media company operates across three business segments, namely entertainment, sports and experiences.
The company expects long-term earnings growth of 10% and achieved an average earnings surprise of 13.6% in the fourth quarter. It has a VGM Score of A. Walt Disney has a Zacks Rank #2. You can see it The complete list of today’s Zacks #1 Rank stocks can be found here.
Leidos: Delaware-based Leidos is a global science and technology leader serving the defense, intelligence, civil and healthcare markets. Its core capabilities include providing solutions in cybersecurity, data analytics, enterprise IT modernization, operations and logistics, sensors, collection and phenomenology, software development and systems engineering.
The company expects long-term earnings growth of 14.8% and achieved an average earnings surprise of 29.9% in the fourth quarter. It has a VGM Score of A. Leidos has a Zacks Rank #1.
Regions Financial: Regions Financial, based in Birmingham, AL, is a financial holding company that provides retail, commercial and mortgage banking, as well as other financial services in asset management, asset management, securities brokerage, trust services, mergers and acquisitions (M&A) advisory services and other specialty financing .
It has a longer-term earnings growth forecast of 4.6% and delivered a four-quarter earnings surprise of 4.4% on average. Regions Financial has a Zacks Rank #2.
You can get the rest of the stocks on this list by signing up for your two-week free trial of the Research Wizard now and starting using this screen in your own trading. Furthermore, you can also create your own strategies and test them first before taking the investment plunge.
The Research Wizard is a good place to start. It is 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 the Research Wizard, plug in your finds, and see what gems emerge.
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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 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 mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies is available at: https://www.zacks.com/performance.
