The U.S. equity markets witnessed immense volatility in the past couple of trading days as the debt ceiling crisis lingered, with negotiators failing to reach a consensus. The market remained mostly on tenterhooks as a failure to lift the debt ceiling will likely trigger a default, leading to chaos in the financial markets and a spike in interest rates. The impasse rattled investors to such an extent that even a dovish statement from Federal Reserve Chair Jerome Powell (that interest rates might not need to rise as much as expected given the tight credit conditions from the banking crisis) failed to improve the market sentiments.
A weaker-than-expected wholesale prices data – often considered a sign of easing inflation – further failed to ease the concerns of a downturn. Wholesale prices rose just 0.2% in April compared with wide expectations of a 0.3% rise. The consumer price index increased 0.4% in April, equating to a 4.9% annual inflation rate – the lowest reading since April 2021. However, continued financial market stress and uncertain business conditions amid a looming debt crisis remained an overhang.
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. Marriott International, Inc. MAR, BorgWarner Inc. BWA, D.R. Horton, Inc. DHI, América Móvil, S.A.B. de C.V. AMX and Triton International Limited TRTN are some of the stocks with high ROE to profit from.
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 12 stocks that qualified the screen:
Marriott: Headquartered in Bethesda, MD, Marriott is a leading worldwide hospitality company focused on lodging management and franchising. As of year-end 2022, the company's portfolio encompassed nearly 8,300 properties under 30 leading brands spanning 138 countries and territories.
It has a long-term earnings growth expectation of 15.5% and delivered a trailing four-quarter earnings surprise of 8%, on average. Currently, Marriott sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
BorgWarner: Michigan-based BorgWarner is a global leader in clean and efficient technology solutions required for combustion, hybrid and electric vehicles. Its products include four-wheel-drive and all-wheel-drive transfer cases (primarily for light trucks and sport utility vehicles or SUVs), as well as automatic transmission and timing chain systems.
The company has a long-term earnings growth expectation of 14.1% and delivered a trailing four-quarter earnings surprise of 15.3%, on average. It has a VGM Score of A. BorgWarner carries a Zacks Rank #2.
D.R. Horton: Based in Texas, D.R. Horton is one of the leading national homebuilders, primarily engaged in the construction and sale of single-family houses both in the entry-level and move-up markets. Its operations are spread across 110 markets in 33 states in the East, Midwest, Southeast, South Central, Southwest and West regions of the United States.
The company has a long-term earnings growth expectation of 15.5% and delivered a trailing four-quarter earnings surprise of 15.3%, on average. D.R. Horton sports a Zacks Rank #1.
América Móvil: Based in Mexico City, America Movil is the leading provider of integrated telecommunications services in Latin America. It offers enhanced communications solutions in 25 countries in Latin America, the United States and Central and Eastern Europe.
The company has a long-term earnings growth expectation of 20.9%. It has a VGM Score of A. America Movil carries a Zacks Rank #2.
Triton: Based in Hamilton, Bermuda, Triton is the largest lessor of intermodal containers (large steel boxes used for transporting freight by ship/rail/truck). The company also focuses on leasing chassis, which are used for transporting containers. It offers leasing services through 19 offices and three independent offices in 16 countries.
The company delivered a trailing four-quarter earnings surprise of 6.3%, on average. Triton 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.
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.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report