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The broader U.S. equity markets witnessed a solid uptrend yesterday as a better-than-expected inflation reading evoked positive sentiments that inflation is easing, albeit slowly. The Consumer Price Index (CPI) data for December revealed that Core CPI, which excludes volatile food and energy prices, rose 0.2% month over month and 3.2% year over year compared with broad-based expectations of 0.3% and 3.3% increase, respectively. This was the first decline in Core CPI from the past three months’ reading of 3.3%.
Despite signs of decelerating inflationary pressures, the Federal Reserve is widely believed to have kept the interest rates steady in its next policy meeting scheduled to be held by the end of 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 like return on equity (ROE). A high ROE ensures that the company is reinvesting cash at a high rate of return. The Walt Disney Company DIS, Leidos Holdings, Inc. LDOS, Raymond James Financial, Inc. RJF, Cencora, Inc. COR and Delta Air Lines, Inc. DAL 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 19 stocks that qualified the screening:
Walt Disney: Burbank, CA-based Walt Disney has assets that span movies, television shows and theme parks. This leading diversified international family entertainment and media enterprise operates through three business segments — Entertainment, Sports and Experiences.
The company has a long-term earnings growth expectation of 10.3% and delivered a trailing four-quarter earnings surprise of 13.6%, on average. It has a VGM Score of A. Walt Disney 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 15.8% and delivered a trailing four-quarter earnings surprise of 7.8%, on average. It has a VGM Score of B. Raymond James carries a Zacks Rank #2.
Cencora: Chesterbrook, PA-based Cencora is one of the world’s largest pharmaceutical services companies. It focuses on providing drug distribution and related services to reduce healthcare costs and improve patient outcomes.
The company has a long-term earnings growth expectation of 10.4% and delivered a trailing four-quarter earnings surprise of 7%, on average. It has a VGM Score of A. Cencora carries a Zacks Rank #2.
Delta Air: Atlanta-GA-based Delta Air is one of the four carriers that together account for 60% of the U.S. aviation market. It commands more than 17% of the domestic market and has hubs and market presence in Amsterdam, London-Heathrow, Mexico City, Paris-Charles de Gaulle and Seoul-Incheon.
The company has a long-term earnings growth expectation of 11.2% and delivered a trailing four-quarter earnings surprise of 6.5%, on average. It has a VGM Score of A. Delta Air 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.