U.S. equity markets rebounded from the recent bearish trend seen in recent days, driven by optimism surrounding President Biden’s China tariff review and rising Treasury yields. The stock market rally put major benchmarks back on a growth path after back-to-back weekly losses raised concerns about the overall impact of oil price volatility and the protracted war between Russia and the United States. Ukraine on the economy.
The US president gave broad indications that he would reconsider eliminating some of the punitive trade barriers and import duties imposed by his predecessor against China. This is expected to revive trade relations for a mutually beneficial bilateral trade relationship. Markets also appear to have priced in a steady rise in yields, with the Fed Chairman enacting aggressive monetary policy to tame rising inflationary pressures.
After one of the largest interest rate hikes since 2000 that put the federal funds rate in a range of 0.75 to 1%, the Fed aims to impose similar increases in the rest of the year to restore price stability. The central bank also offered a general overview of its reduction in assets held for monetary tightening. The Fed intends to cut Treasury holdings and mortgage-backed securities by $30 billion and $17.5 billion, respectively, starting in June and expand counts to $65 billion and $35 billion after a three-month period.
While investors use a wait-and-see approach in a classic example of “support and fill” in the market, they can benefit from “cash cow” stocks that generate higher returns. However, identifying cash-rich stocks alone is not a strong investment proposition, unless it is backed by attractive efficiency ratios such as return on equity (ROE). A high ROE ensures that the company reinvests its cash at a high rate of return. Louisiana-Pacific Corporation LPX, The Interpublic, Inc. group of companies GPI, public storage PSA, APA Corporation ABS and Dillard’s, Inc. DDS are among the stocks with a high ROE to profit from.
ROE: a key measure
ROE = Net income/Equity
ROE helps investors distinguish profit-generating companies from profit-burners and is useful in determining a company’s financial health. In other words, this financial metric allows investors to identify companies that diligently deploy cash for higher returns.
Additionally, ROE is often used to compare a company’s profitability to that of other companies in the industry – the higher, the better. It measures how well a company multiplies its profits without investing new equity and depicts management’s effectiveness in rewarding shareholders with attractive risk-adjusted returns.
Parameters used for screening
In order to screen out cash-rich stocks with a high ROE, we added Cash flow over $1 billion and ROE higher than X-Industry as our main screening parameters. In addition, we took into consideration a few other criteria to arrive at a winning strategy.
Price/Cash Flow lower than X-Industry: This metric measures how much investors pay for $1 of free cash flow. A lower ratio indicates that investors should pay less for a stock that generates more cash flow.
Return on assets (ROA) higher than X-Industry: This measure determines the profit a business makes for every dollar of assets, which includes cash, accounts receivable, property, equipment, inventory, and furniture. The higher the ROA, the better for the business.
Historic EPS growth over 5 years higher than X-Industry: This metric indicates that continued earnings momentum has translated into strong cash.
Zacks rank less than or equal to 2: Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform regardless of the market environment.
Here are five of the 21 stocks that qualified the screen:
Louisiana-Pacific Society: Based in Nashville, TN, Louisiana-Pacific is a leading manufacturer of quality, durable engineered wood building materials, framing and siding products for residential, industrial and light commercial construction. The Company’s products are primarily used in new home construction, repair and renovation, and outdoor structures.
Louisiana-Pacific recorded a surprise on earnings for the last four quarters of 14% on average. He sports a Zacks rank #1. You can see the full list of today’s Zacks #1 Rank stocks here.
The Interpublic, Inc. group of companies: New York-based Interpublic, together with its subsidiaries, provides advertising and marketing services worldwide. It offers multi-channel advertising, communication and marketing services such as meeting and event production, public relations, sports and entertainment marketing, corporate and brand identity and marketing consultancy. strategy to a large list of customers in more than 110 countries.
The company has a long-term earnings growth expectation of 4.4% and has posted a trailing four-quarter earnings surprise of 26%, on average. Interpublic wears a No. 2 Zacks rank.
Public storage: Based in Glendale, California, Public Storage is one of the leading self-storage real estate investment funds in the United States. The Company acquires, develops, owns and operates self-storage facilities, generally on a monthly basis for business and personal use. The company recorded a surprise on earnings for the last four quarters of 4.5% on average.
Public Storage carries a Zacks rank of No. 2. The company forecasts long-term earnings growth of 7.1%. The ‘Public Storage’ brand is the most recognized and established name in the self-storage industry, with a presence in all major metropolitan markets nationwide.
APA Company: Founded in 1954, APA Corporation, based in Houston, Texas, is one of the world’s leading independent energy companies engaged in the exploration, development and production of natural gas, crude oil and natural gas liquids. Regionally, the Company’s operations are in the United States, Egypt and the North Sea in the United Kingdom. APA also owns acreage off the coast of Suriname (South America) and other international locations.
This Zacks No. 2-ranked company has a long-term earnings growth expectation of 26.5% and delivered a four-quarter earnings surprise of 5.7%, on average. APA’s high-quality drill inventory with greater resource potential should enable it to deliver competitive growth per share.
Dillard’s, Inc.: Founded in 1938, Dillard’s is a large chain of department stores offering fashion clothing and home furnishings. Its merchandise assortment consists of both branded and private label items. The company’s strategy is to offer more avant-garde and fashionable products to attract customers.
Dillard’s is benefiting from continued momentum in consumer demand and better inventory management. The company has a long-term earnings growth expectation of 14.6% and posted a trailing four-quarter earnings surprise of 224.1%, on average. Dillard sports a No. 1 Zacks rank.
You can get the rest of the stocks on this list by signing up for your free 2-week trial to Research Assistant now and start using this screen in your own trading. Moreover, you can also create your own strategies and test them before diving into investing.
The research assistant is a great starting point. It’s easy to use. Everything is in plain language. And it’s very intuitive. Start your search assistant trial today. And the next time you’re reading an economic report, open up the research assistant, plug in your findings, and see what gems come out.
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 the options mentioned herein. An affiliated investment adviser may hold or have shorted securities and/or hold long and/or short positions in options mentioned herein.
Disclosure: Information on the performance of Zacks portfolios and strategies is available at: https://www.zacks.com/performance.
Zacks names ‘only one best choice for doubling up’
From thousands of stocks, 5 Zacks experts have each picked their favorite to skyrocket by +100% or more in the coming months. Of these 5, Research Director Sheraz Mian selects one to have the most explosive advantage of all.
It’s a little-known chemical company that’s up 65% year-on-year, but still very cheap. With relentless demand, rising earnings estimates for 2022 and $1.5 billion for stock buybacks, retail investors could jump in at any moment.
This company could rival or surpass other recent Zacks stocks which are expected to double, such as Boston Beer Company which jumped +143.0% in just over 9 months and NVIDIA which jumped +175.9% in one. year.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.