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The Q1 earnings season has confuted the naysayers, thanks to solid performances by various sectors. With earnings and revenue growth scaling higher than in comparable periods, it appears that the equity markets have shed the recent skepticism about President Trump’s ability to deliver on his pro-growth promises. However, sublime tensions between North Korea and the U.S. partially mar the otherwise rosy earnings picture, raising an element of caution among investors.

Amid such an equivocal scenario, investors are often on the lookout for ‘cash cow’ stocks that will enable them to rake in higher returns.

However, singling out cash-rich stocks alone does not make for a solid investment proposition unless they are backed by attractive efficiency ratios like return on equity (ROE). A high ROE ensures that the company is reinvesting its cash at a high rate of return.

Why ROE?

ROE = Net Income/Shareholders’ Equity

ROE helps investors distinguish between profit-generating companies from profit burners and is useful for determining the financial health of a company. In other words, this financial metric enables investors to identify stocks 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 increasing its profits without investing new equity capital in the business and portrays management 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 less than X-Industry: This metric measures how much investors pay for one dollar 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 11 stocks that qualified the screen:

Lear Corporation LEA: Headquartered in Southfield, MI, Lear is one of the leading manufacturers of automotive seating, electrical distribution systems, and related components across the globe. The company is celebrating its centenary year in 2017. This Zacks Rank #2 stock has a trailing four-quarter average earnings surprise of 8.7% and long-term earnings growth expectation of 7.1%.

BT Group plc BT: Headquartered in London, BT Group is one of the world's leading providers of communications services and solutions, serving customers in 180 countries. The company has a trailing four-quarter average earnings surprise of 8.0% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Monsanto Company MON: Founded in 2000 and headquartered in St. Louis, MO, Monsanto is a leading global provider of agricultural products. This Zacks Rank #2 stock has a healthy long-term earnings growth expectation of 12.1% and a stellar trailing four-quarter average earnings surprise of 313.9%.

Ternium S.A. TX: Headquartered in Buenos Aires, Argentina, Ternium manufactures and processes various steel products in Latin America, the U.S., Central America, and internationally. This Zacks Rank #2 stock has a healthy trailing four-quarter average earnings surprise of 20.0% and long-term earnings growth projection of 18.4%.

Credicorp Ltd. BAP: Based in Hamilton, Bermuda, Credicorp offers a range of financial, insurance, and health services and products primarily in Peru and internationally. This Zacks Rank #2 stock has a trailing four-quarter average earnings surprise of 8.8% and long-term earnings growth projection of 11.4%.