The earnings season has unfolded on a relatively promising note, with better-than-expected performance dispelling widespread recessionary fears. Buoyed by the renewed optimism and encouraging trends from the hitherto declared results, the equity markets are currently trading near record highs and appear well poised to continue the uptrend.
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 these 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 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 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 17 stocks that qualified the screen:
Best Buy Co., Inc. BBY: Incorporated in 1966 and headquartered in Richfield, MN, Best Buy is a multi-national specialty retailer of consumer electronics, home office products, entertainment software, appliances and related services. This Zacks Rank #2 company delivered a trailing four-quarter average positive earnings surprise of 8.6%. It has a long-term earnings growth projection of 8.8%.
Bristol-Myers Squibb Company BMY: New York-based Bristol-Myers Squibb is a global specialty biopharmaceutical firm focused on the development of treatments targeting serious diseases. The company pulled off a trailing four-quarter average positive earnings surprise of 14.3%. It has a long-term earnings growth projection of 4.7%. Currently, Bristol-Myers Squibb carries a Zacks Rank #2.
Cigna Corporation CI: Headquartered in Bloomfield, CT and formed in 1982, Cigna provides insurance and related products and services in the United States and internationally. The company has a long-term earnings growth expectation of 12.4%, with a trailing four-quarter average positive earnings surprise of 11.8%. Cigna currently sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
PepsiCo, Inc. PEP: Headquartered in Purchase, NY, PepsiCo is one of the leading global food and beverage companies. Its complementary brands/businesses include Frito-Lay snacks, Pepsi-Cola beverages, Gatorade sports drinks, Tropicana juices and Quaker foods. This Zacks #2 Ranked company delivered a trailing four-quarter average positive earnings surprise of 3.5%. It has a long-term earnings growth projection of 7.4%.
The Progressive Corporation PGR: Based in Mayfield Village, OH, Progressive is one of the major auto insurers in the country. Founded in 1965, the company is a leading independent agency writer of private passenger auto coverage. It came up with a trailing four-quarter average positive earnings surprise of 6%. The company has a long-term earnings growth expectation of 7.3%. Progressive currently carries a Zacks Rank of 2.
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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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Bristol-Myers Squibb Company (BMY) : Free Stock Analysis Report
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