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The broader equity markets witnessed intense volatility over the past few trading days as apprehensions related to U.S. tech supremacy and innovation, with a China-based startup, DeepSeek, offering artificial intelligence (AI) innovations at a fraction of the cost, put an entire ecosystem built around massive AI investments in jeopardy. Consequently, the blue-chip tech firms went into a tailspin, rattling overall markets. In addition, the Federal Reserve’s decision to keep the interest rates unchanged in a range between 4.25% and 4.5% amplified the slide. Although the Fed stance was widely expected, the cautious view toward sticky inflation raised concerns about the pace of future rate cuts.
Nevertheless, with solid quarterly results from hitherto reported technology companies, markets were quick to bounce back despite GDP accelerating at a 2.3% annualized inflation-adjusted pace in the fourth quarter compared with broad-based expectations of 2.5% growth. 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. Ross Stores, Inc. ROST, Leidos Holdings, Inc. LDOS, Raymond James Financial, Inc. RJF, Fortinet, Inc. FTNT and Assurant, Inc. AIZ 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 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:
Ross Stores: Based in Dublin, CA, Ross Stores is an off-price retailer of apparel and home accessories, primarily in the United States. The company operates its stores under the Ross Dress for Less (Ross) and dd’s DISCOUNTS names. The company’s stores are located mostly in community and neighborhood shopping centers in heavily populated urban and suburban areas.
The company has a long-term earnings growth expectation of 9.8% and delivered a trailing four-quarter earnings surprise of 8.5%, on average. Ross Stores 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 14.8% and delivered a trailing four-quarter earnings surprise of 29.9%, on average. It has a VGM Score of A. Leidos carries a Zacks Rank #2.
Raymond James: Based in St. Petersburg, FL, Raymond James is a diversified company that provides financial services mainly in the United States and Canada. The company has approximately 8,800 financial advisors with total client assets of $1.54 trillion.
It has a long-term earnings growth expectation of 14.9% and delivered a trailing four-quarter earnings surprise of 7.8%, on average. Raymond James 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 18.6% and delivered a trailing four-quarter earnings surprise of 23.6%, on average. It has a VGM Score of B. Fortinet carries a Zacks Rank #2.
Assurant: Headquartered in New York, Assurant is a global provider of risk management solutions in the housing and lifestyle markets, protecting where people live and the goods they buy. The company operates in North America, Latin America, Europe and Asia Pacific.
The company delivered a trailing four-quarter earnings surprise of 20.3%, on average. It has a VGM Score of B. Assurant carries a Zacks Rank #2.
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.
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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.