The broader equity markets witnessed intense volatility over the past few days in sync with the bond yields but in the opposite direction. After surging to multi-decade highs, bond yields declined significantly as the Treasury Department announced plans to more than double the size of its government debt repurchases. This apparently helped the stock market snap a three-day losing streak and revive its momentum.
However, surging oil prices and economic sanctions against Iran, which President Trump claimed to be the “Economic Warfare and Isolation on an unprecedented scale,” added to the cacophony and pulled equity markets down while pushing bond yields higher. With a lasting peace agreement in the Middle East appearing to be far from being guaranteed, market uncertainty remained elevated.
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. The Allstate Corporation ALL, Arista Networks, Inc. ANET, Annaly Capital Management, Inc. NLY, Gartner, Inc. IT and AMETEK, Inc. AME are some of the stocks with high ROE to profit from.
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 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.
Screening Parameters
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 10 stocks that qualified the screening:
Allstate: Headquartered in Northbrook, IL, Allstate is the third-largest property-casualty (P&C) insurer and the largest publicly held personal lines carrier in the United States. The company also provides a range of life insurance and investment products to its diverse customer base. It provides insurance products to approximately 16 million households through more than 12,000 exclusive agencies and financial specialists in the United States and Canada.
The company has a long-term earnings growth expectation of 19% and delivered a trailing four-quarter earnings surprise of 45.3%, on average. It has a VGM Score of A. Allstate sports a Zacks Rank #1 at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Arista: Santa Clara, CA-based Arista is engaged in providing cloud networking solutions for data centers and cloud computing environments. The company holds a leadership position in 100-gigabit Ethernet switching for the high-speed datacenter segment. It is increasingly gaining market traction in 200- and 400-gig high-performance switching products and remains well-positioned for healthy growth in the data-driven cloud networking business with proactive platforms and predictive operations.
The company has a long-term earnings growth expectation of 26.1%. It delivered a trailing four-quarter earnings surprise of 8.9%, on average. Arista sports a Zacks Rank #1.
Annaly: Based in New York, Annaly is a mortgage real estate investment trust that primarily owns, manages and finances a portfolio of real estate-related investment securities. Its investment portfolio includes mortgage pass-through certificates, collateralized mortgage obligations and credit risk transfer.
The company has a long-term earnings growth expectation of 1.2%. It delivered a trailing four-quarter earnings surprise of 3.1%, on average. Annaly currently carries a Zacks Rank #2.
Gartner: Headquartered in Stamford, CT, Gartner is reportedly the world’s leading information technology research and advisory firm. The company offers rich domain expertise and technology-related insight necessary for an informed decision-making process.
Gartner has a long-term earnings growth expectation of 21% and delivered a trailing four-quarter earnings surprise of 13.5%, on average. Gartner sports a Zacks Rank #1.
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 worldwide. 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 9.4%. It delivered a trailing four-quarter earnings surprise of 4.9%, on average. AMETEK carries a Zacks Rank #2.