The broader equity markets witnessed an erratic pattern over the past few trading days – rising sharply on an AI-infused rally early this week and declining mid-week on surging Treasury yields and oil prices. While the 10-year Treasury note yield surged to the highest levels since 2002, the 30-year Treasury bond yield traded near 24-year highs, driving stocks lower. Crude oil prices soared as Iran rhetoric continued, with President Trump threatening massive bombings and declining to sign any truce agreement to end the war.
Stable economic growth and solid labor market conditions have led to broad-based concerns that the Fed might resort to further rate hikes to tame inflationary pressures. Nevertheless, interest rates are likely to remain unchanged at the next Federal Reserve meeting later this month. 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. Micron Technology, Inc. MU, Banco Bilbao Vizcaya Argentaria, S.A. BBVA, Ross Stores, Inc. ROST, VICI Properties Inc. VICI and PACCAR Inc PCAR 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 15 stocks that qualified the screening:
Micron: Headquartered in Idaho, Micron is one of the leading providers of semiconductor memory solutions. It manufactures and markets high-performance memory and storage technologies, including Dynamic Random Access Memory (DRAM), NAND flash memory, NOR Flash and other technologies. Its solutions are used in leading-edge computing, consumer, networking, mobile, automotive, industrial and data center products.
The company has a long-term earnings growth expectation of 32.6%. It delivered a trailing four-quarter earnings surprise of 21%, on average. It has a VGM Score of A. Micron sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
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 15.7%. It delivered a trailing four-quarter earnings surprise of 3.5%, on average. It has a VGM Score of A. Banco Bilbao sports a Zacks Rank #1.
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 generally 20% to 60% below the regular prices of most department and specialty stores.
The company has a long-term earnings growth expectation of 14.6%, It delivered a trailing four-quarter earnings surprise of 11.2%, on average. It has a VGM Score of B. Ross carries a Zacks Rank #2 at present.
VICI: New York-based VICI is an experiential real estate investment trust (REIT) that owns and acquires gaming, hospitality, wellness, entertainment and leisure destinations. The company is a Maryland corporation and an internally managed REIT for U.S. federal income tax purposes.
VICI delivered a trailing four-quarter earnings surprise of 0.4%, on average. VICI carries a Zacks Rank #2.
PACCAR: Headquartered in Bellevue, WA, PACCAR is a leading manufacturer of heavy-duty trucks in the world and has substantial manufacturing exposure to light/medium trucks. It also designs and manufactures diesel engines and other powertrain components for use in its products and sale to third-party manufacturers of trucks and buses. In addition to supplying aftermarket parts, PACCAR offers finance and leasing services.
The company has a long-term earnings growth expectation of 14.8% and delivered a trailing four-quarter earnings surprise of 2.3%, on average. PACCAR carries a Zacks Rank #2 at present.
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Micron Technology, Inc. (MU): Free Stock Analysis Report
PACCAR Inc. (PCAR): Free Stock Analysis Report
Ross Stores, Inc. (ROST): Free Stock Analysis Report
Banco Bilbao Viscaya Argentaria S.A. (BBVA): Free Stock Analysis Report
VICI Properties Inc. (VICI): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).