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Despite a sharp rally following the Federal Reserve's assurance of two rate cuts in 2025, the broader equity markets trended down on average over the past few trading days, as President Trump’s on-again, off-again tariffs on Canada and Mexico continued to weigh on stocks. While keeping interest rates steady, Fed Chair Jerome Powell remained firm on his two interest rate cut commitments owing to solid labor market conditions and inflation inching closer to the 2% target. However, he also hinted at increasing uncertainty about the economic outlook due to the lingering tariff threats on major trade partners.
With markets entering correction territory, all eyes remained glued on the White House for further clarity on impending policy changes. 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. MPLX LP MPLX, Leidos Holdings, Inc. LDOS, Jazz Pharmaceuticals plc JAZZ, Fortinet, Inc. FTNT and Pilgrim's Pride Corporation PPC 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 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 13 stocks that qualified the screening:
MPLX: Findlay, OH-based MPLX LP is a master limited partnership engaged in providing a wide range of midstream energy services, including fuel distribution solutions. The large-cap partnership was created in 2012 to own, operate and develop midstream energy infrastructure and logistics assets, mostly for its parent company, Marathon Petroleum Corporation.
It has a long-term earnings growth expectation of 7.2% and delivered a trailing four-quarter earnings surprise of 3.6%, on average. MPLX carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Leidos: Delaware-based Leidos is a global science and technology leader serving the defense, intelligence, civil and health markets. Its core capabilities include providing solutions in cybersecurity, data analytics, enterprise IT modernization, operations and logistics, sensors, collection and phenomenology, software development and systems engineering.
The company has a long-term earnings growth expectation of 7.4% and delivered a trailing four-quarter earnings surprise of 28.3%, on average. It has a VGM Score of B. Leidos carries a Zacks Rank #2.
Jazz Pharmaceuticals: Dublin, Ireland-based Jazz Pharmaceuticals is a specialty biopharmaceutical company with a focus on neuroscience and oncology. The company derives most of its revenues from its sleep disorder drugs — Xywav and Xyrem.
It has a long-term earnings growth expectation of 7.3% and delivered a trailing four-quarter earnings surprise of 3.2%, on average. It has a VGM Score of B. Jazz Pharmaceuticals carries a Zacks Rank #2.
Fortinet: Headquartered in Sunnyvale, CA, Fortinet is a provider of network security appliances and Unified Threat Management network security solutions to enterprises, service providers and government entities worldwide. Its solutions are designed to integrate multiple levels of security protection, including firewall, virtual private networking, antivirus, intrusion prevention, web filtering, anti-spam and wide area network acceleration.
The company has a long-term earnings growth expectation of 13% and delivered a trailing four-quarter earnings surprise of 24.8%, on average. Fortinet carries a Zacks Rank #2.
Pilgrim's Pride: Greeley, CO-based Pilgrim's Pride is engaged in the processing, production, marketing and distribution of frozen, fresh and value-added chicken products. The company offers its services in the United States, Mexico, France, the Netherlands, Puerto Rico and Mexico through several distributors, retailers and food service operators.
The company delivered a trailing four-quarter earnings surprise of 25.7%, on average. It has a VGM Score of A. Pilgrim's Pride 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.
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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.