The U.S. equity markets continued their December selloff after a brief respite as higher-than-expected GDP data signaled an improving economy that fueled speculations of more interest rate hikes around the corner. The latest Commerce Department reading indicated that GDP grew at an annual pace of 3.2% between July and September, compared with broad-based expectations of a 2.9% increase. In addition, the consumer confidence index registered a reading of 108.3 in December – the highest since April 2022 and significantly up from 101.4 recorded in November. The labor market also remained strong, with unemployment claims remaining relatively unchanged in the weekly Labor Department report.
The economic indicators signified that the overall economy was comparatively better placed for the Fed to continue its aggressive stance against inflation, putting the brakes on a short-term rally witnessed earlier. The Fed recently increased its benchmark interest rates by half a percentage point to a targeted range between 4.25% and 4.5% and put the “terminal rate” to a target range of 5-5.25%
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.
Jabil Inc.
JBL
,
Ryder System, Inc.
R
,
AGNC Investment Corp.
AGNC
,
CNH Industrial N.V.
CNHI
and
Suzano S.A.
SUZ
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.
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 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 14 stocks that qualified the screen:
Jabil:
Headquartered in St. Petersburg, FL, Jabil is one of the largest global suppliers of electronic manufacturing services. The company offers electronics design, product management and after-market services to customers catering to aerospace, automotive, computing, consumer, defense, industrial, instrumentation, medical, networking, peripherals, storage and telecommunications industries.
It delivered a trailing four-quarter earnings surprise of 8.8%, on average, and has a long-term earnings growth expectation of 12%. It has a
VGM Score
of A. Currently, Jabil sports a Zacks Rank #1. You can see
the complete list of today’s Zacks #1 Rank stocks here
.
Ryder System:
Florida-based Ryder System is recognized as one of the world’s largest providers of integrated logistics and transportation solutions. It serves a variety of industries, the most significant of which are automotive, electronics, transportation, grocery, lumber and wood products, food service and home furnishing.
The company delivered a trailing four-quarter earnings surprise of 30.1%, on average. Ryder System carries a Zacks Rank #2. It has a VGM Score of A.
AGNC Investment:
Previously known as American Capital Agency Corp., AGNC Investment is a real estate investment trust focused on leveraged investments in Agency residential mortgage-backed securities. These include residential mortgage pass-through securities and collateralized mortgage obligations.
AGNC Investment adheres to an active portfolio-management policy, which includes re-evaluation and adjustment of its portfolio and hedges amid a varying interest rate and mortgage market environment. The company delivered a trailing four-quarter earnings surprise of 22.1%, on average. AGNC Investment carries a Zacks Rank #2.
CNH Industrial:
Headquartered in London, the United Kingdom, CNH Industrial is one of the leading equipment and services companies engaged in the manufacture and sale of agricultural and construction equipment. Currently, CNH Industrial has a commercial presence in approximately 180 countries.
The company delivered a trailing four-quarter earnings surprise of 18.9%, on average. CNH Industrial sports a Zacks Rank #1.
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.
Suzano has a long-term earnings growth expectation of 8.1% and delivered a trailing four-quarter earnings surprise of 53.8%, on average. It has a VGM Score of A. It 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
.
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