The U.S. equity markets inched up in the past few trading sessions, buoyed by better-than-expected economic growth and healthy earnings performance from hitherto reported companies. The fourth-quarter GDP rose at a 2.9% annualized rate compared with broad-based expectations of 2.8% growth. Consumer spending was up 2.1% in the October-December period, marginally down from 2.3% on a sequential basis as inflationary pressures remain an overhang. The personal consumption expenditure price index increased 3.2%, down from 4.8% recorded in the third quarter. The employment cost index showed compensation increased 1% in the fourth quarter, slightly down from broad-based expectations of a 1.1% rise.
The economic indicators aroused hopes that the Fed will likely consider putting the brakes on its aggressive stance against inflation, fueling the stock market rally. The healthy equity market uptick in January portends a relatively robust performance for the full year. Investors widely expect the rally to continue in the short term, forcing the Fed to be more dovish toward the rate hike regime. The Fed had increased its benchmark interest rates by half a percentage point in its last policy meeting to a targeted range between 4.25% and 4.5% and put the “terminal rate” to a target range of 5-5.25%
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. Jabil Inc. JBL, Delta Air Lines, Inc. DAL, AGNC Investment Corp. AGNC, Hologic, Inc. HOLX and Suzano S.A. SUZ are some of the stocks with high ROE to profit from.
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 17 stocks that qualified the screen:
Jabil: Headquartered in St. Petersburg, FL, Jabil is one of the largest global suppliers of electronic manufacturing services. The company offers electronics design, product management and after-market services to customers catering to aerospace, automotive, computing, consumer, defense, industrial, instrumentation, medical, networking, peripherals, storage and telecommunications industries.
It delivered a trailing four-quarter earnings surprise of 8.8%, on average, and has a long-term earnings growth expectation of 12%. It has a VGM Score of A. Currently, Jabil sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Delta Air: Based in Atlanta, GA, Delta Air is one of the four carriers controlling most of the U.S. aviation market. It is the second airline company to have joined the coveted S&P 500 Index. It has hubs and market presence in Amsterdam, London-Heathrow, Mexico City, Paris-Charles de Gaulle and Seoul-Incheon.
Delta Air carries a Zacks Rank #2. It has a VGM Score of B.
AGNC Investment: Previously known as American Capital Agency Corp., AGNC Investment is a real estate investment trust focused on leveraged investments in Agency residential mortgage-backed securities. These include residential mortgage pass-through securities and collateralized mortgage obligations.
AGNC Investment adheres to an active portfolio-management policy, which includes re-evaluation and adjustment of its portfolio and hedges amid a varying interest rate and mortgage market environment. The company delivered a trailing four-quarter earnings surprise of 21.3%, on average. AGNC Investment carries a Zacks Rank #2.
Hologic: Headquartered in Bedford, MA, Hologic develops, manufactures and supplies diagnostics, medical imaging systems and surgical products that cater to the healthcare needs of women. The company is currently focusing on expanding its business across the patient continuum of care and has launched new software products based on its investments in artificial intelligence.
Hologic has a VGM Score of B. The company has a long-term earnings growth expectation of 15.2% and delivered a trailing four-quarter earnings surprise of 46.1%, on average. Hologic carries a Zacks Rank #2.
Suzano: Headquartered in Salvador, Brazil, Suzano produces and sells eucalyptus pulp and paper products. With more than 90 years of experience, this vertically integrated firm is one of the largest producers of paper and graphic products in South America.
Suzano has a long-term earnings growth expectation of 8.8% and delivered a trailing four-quarter earnings surprise of 53.8%, on average. It has a VGM Score of A. It sports a Zacks Rank #1.
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.
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