After scaling record-high territories last week, the broader equity markets stumbled this week as oil prices surged following President Trump’s tirade against Iran for attacks against three commercial vessels traveling in the Strait of Hormuz. Threatening to terminate the now-on-now-off truce agreement, the U.S. President launched fresh attacks on Iran and vowed to hit it hard further in a series of retaliatory strikes.
The renewed hostilities in the Middle East prompted investors to reassess the geopolitical risks and embrace the idea of market volatility as the new normal, as a lasting U.S.-Iran agreement appears to be far from guaranteed. 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, Suzano S.A. SUZ, Bilbao Vizcaya Argentaria, S.A. BBVA, Globe Life Inc. GL and AMETEK, Inc. AME 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 17 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 sports a Zacks Rank #1 at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Suzano: Headquartered in Salvador, Brazil, Suzano produces and sells eucalyptus pulp and paper products. With more than 90 years of experience, this vertically integrated firm is one of the largest producers of paper and graphic products in South America.
The company offers coated and uncoated printing and writing papers, paperboards, tissue papers and lignin. It has a long-term earnings growth expectation of 44.1%. Suzano sports a Zacks Rank #1.
Banco Bilbao: Headquartered in Bilbao, Spain, Banco Bilbao provides retail banking, wholesale banking and asset management services primarily in Spain, Mexico, Turkey, the Rest of Europe, South America, the United States and Asia.
The company has a long-term earnings growth expectation of 16.9%. It delivered a trailing four-quarter earnings surprise of 4.5%, on average. Banco Bilbao carries a Zacks Rank #2.
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.
AMETEK: Located in Berwyn, PA, AMETEK is one of the leading manufacturers of electronic appliances and electromechanical devices. It has more than 120 operating sites all over the world. The company operates more than 80 sales and service stations in North America, Europe, Asia and South America to support these operations.
The company has a long-term earnings growth expectation of 8.8%. It delivered a trailing four-quarter earnings surprise of 5.2%, on average. AMETEK carries a Zacks Rank #2.
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Ross Stores, Inc. (ROST): Free Stock Analysis Report
AMETEK, Inc. (AME): Free Stock Analysis Report
Banco Bilbao Viscaya Argentaria S.A. (BBVA): Free Stock Analysis Report
Suzano S.A. Sponsored ADR (SUZ): Free Stock Analysis Report
Globe Life Inc. (GL): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).