The broader equity markets shrugged off apprehensions as President Trump indicated that his proposed tariffs on foreign countries would not be imposed immediately and would be determined only after a thorough analysis of each affected nation. This appeared to calm the frayed investor nerves with markets witnessing an uptrend to annul the recent spate of losses triggered by the sudden proposed change in the U.S. trade policies.
Moreover, a better-than-expected producer price index reading of a 0.4% increase in January reflected that inflationary pressure was not as severe as was widely feared. In addition, a healthy jump by a blue-chip tech firm propelled the stock market uptick. 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. Ross Stores, Inc. ROST, Leidos Holdings, Inc. LDOS, Raymond James Financial, Inc. RJF, Fortinet, Inc. FTNT and Pilgrim's Pride Corporation PPC are some of the stocks with high ROE to profit from.
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.
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 nine stocks that qualified the screening:
Ross Stores: Based in Dublin, CA, Ross Stores is an off-price retailer of apparel and home accessories, primarily in the United States. The company operates its stores under the Ross Dress for Less (Ross) and dd’s DISCOUNTS names. The company’s stores are located mostly in community and neighborhood shopping centers in heavily populated urban and suburban areas.
The company has a long-term earnings growth expectation of 9.8% and delivered a trailing four-quarter earnings surprise of 8.5%, on average. It has a VGM Score of B. Ross Stores carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Leidos: Delaware-based Leidos is a global science and technology leader serving the defense, intelligence, civil and health 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 has a long-term earnings growth expectation of 7.4% and delivered a trailing four-quarter earnings surprise of 28.3%, on average. It has a VGM Score of A. Leidos carries a Zacks Rank #2.
Raymond James: Based in St. Petersburg, FL, Raymond James is a diversified company that provides financial services mainly in the United States and Canada. The company has approximately 8,800 financial advisors with total client assets of $1.54 trillion.
It has a long-term earnings growth expectation of 15.4% and delivered a trailing four-quarter earnings surprise of 7.8%, on average. It has a VGM Score of A. Raymond James carries a Zacks Rank #2.
Fortinet: Headquartered in Sunnyvale, CA, Fortinet is a provider of network security appliances and Unified Threat Management network security solutions to enterprises, service providers and government entities worldwide. Its solutions are designed to integrate multiple levels of security protection, including firewall, virtual private networking, antivirus, intrusion prevention, web filtering, anti-spam and wide area network acceleration.
The company has a long-term earnings growth expectation of 13% and delivered a trailing four-quarter earnings surprise of 24.8%, on average. Fortinet carries a Zacks Rank #2.
Pilgrim's Pride: This Greeley, CO-based Pilgrim's Pride is engaged in the processing, production, marketing and distribution of frozen, fresh and value-added chicken products. The company offers its services in the United States, Mexico, France, the Netherlands, Puerto Rico and Mexico through several distributors, retailers and food service operators.
The company delivered a trailing four-quarter earnings surprise of 25.7%, on average. It has a VGM Score of A. Pilgrim's Pride sports a Zacks Rank #1.
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.
Click here to sign up for a free trial to the Research Wizard today.
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.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Ross Stores, Inc. (ROST) : Free Stock Analysis Report
Pilgrim's Pride Corporation (PPC) : Free Stock Analysis Report
Raymond James Financial, Inc. (RJF) : Free Stock Analysis Report
Fortinet, Inc. (FTNT) : Free Stock Analysis Report
Leidos Holdings, Inc. (LDOS) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.