The broader equity markets witnessed intense volatility over the past week, hitting record highs on one hand and plummeting sharply on the other, as skirmishes in the Iran-U.S. war continued with a fragile ceasefire agreement. As oil prices swung across the fulcrum, bond yields soared, and equity markets took a hammering amid concerns over rising inflation. However, the markets were quick to bounce back as investors appeared to rotate out of chip names in favor of non-tech stocks despite an AI-infused inherent market strength.
The persistent Iran blockade and restrictions in the Strait of Hormuz continue to add to the stock market misery, with uncertainty being the order of the day. 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, such as return on equity (ROE). A high ROE ensures that the company is reinvesting cash at a high rate of return. Ross Stores, Inc. ROST, TE Connectivity plc TEL, Cenovus Energy Inc. CVE, Globe Life Inc. GL and The Charles Schwab Corporation SCHW are some of the stocks with high ROE to profit from.
Why ROE?
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 less 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 assets, 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 14 stocks that qualified the screening:
Ross: Based in Dublin, CA, Ross is an off-price retailer of apparel and home accessories, offering in-season, branded and designer apparel, footwear, accessories and other home-related merchandise. Operating primarily in the United States, it targets middle-income households, keeping prices at generally 20% to 60% below the regular prices of most department and specialty stores.
The company has a long-term earnings growth expectation of 11.5% and delivered a trailing four-quarter earnings surprise of 10.2%, on average. Ross carries a Zacks Rank #2 at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
TE Connectivity: Based in Galway, Ireland, TE Connectivity is a global technology company that designs and manufactures connectivity and sensor solutions for a wide range of industries, including automotive, aerospace, defense, energy and medical. With operations in more than 130 countries, TE Connectivity focuses on emerging technologies such as 5G, electric vehicles, industrial automation and smart cities to position itself at the forefront of connectivity advancements.
The company has a long-term earnings growth expectation of 12.5%. It delivered a trailing four-quarter earnings surprise of 6%, on average. It has a VGM Score of B. TE Connectivity carries a Zacks Rank #2.
Cenovus Energy: Calgary, Canada-based Cenovus Energy is a leading integrated energy firm. Starting from pumping out oil from its oil sands projects in Canada, the company’s operations comprise marketing the produced oil, natural gas and natural gas liquids. CVE supplies oil to the Gulf Coast of the United States through the Enbridge Flanagan South pipeline.
It has a VGM Score of A and delivered a trailing four-quarter earnings surprise of 50.8%, on average. Cenovus Energy currently sports a Zacks Rank #1.
Globe Life: Based in McKinney, TX, Globe Life is an insurance holding company that markets primarily individual life and supplemental health insurance to lower-middle to middle-income households throughout the United States. The company's insurance subsidiaries write a variety of non-participating ordinary life insurance products, which include traditional whole life, term life and other life insurance. Globe Life offers Medicare Supplement and limited-benefit supplemental health insurance products that include primarily critical illness and accident plans.
It delivered a trailing four-quarter earnings surprise of 1.1%, on average. Globe Life carries a Zacks Rank #2 at present.
Charles Schwab: Headquartered in Westlake, TX, The Charles Schwab Corporation is a savings and loan holding company that provides wealth management, securities brokerage, banking, asset management, custody and financial advisory services. The company has nearly 400 branches across 48 states and the District of Columbia, as well as locations in Puerto Rico, the U.K., Hong Kong and Singapore.
The company has a long-term earnings growth expectation of 17.3%. It delivered a trailing four-quarter earnings surprise of 3.8%, on average. Charles Schwab carries a Zacks Rank #2.
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The Charles Schwab Corporation (SCHW): Free Stock Analysis Report
Ross Stores, Inc. (ROST): Free Stock Analysis Report
TE Connectivity Ltd. (TEL): Free Stock Analysis Report
Cenovus Energy Inc (CVE): Free Stock Analysis Report
Globe Life Inc. (GL): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).