The U.S. equity markets witnessed a short-term rally for 11 days on the trot – the longest winning streak since February 2017 – buoyed by a solid earnings performance from hitherto reported companies. The better-than-expected corporate earnings driven by broad-based growth across sectors allayed the fears of a recession in the near term and instilled optimism.

The stock market rally was also perhaps driven by the Federal Reserve’s decision to hit a pause button for the rate hike program owing to a slowdown in inflation and maintain a benchmark interest rate in the range of 5-5.25%. However, the minutes from the Jun 13-14 Fed meeting revealed that more rate hikes are in the cards to bring inflation close to the targeted 2% level.

The focus has now shifted to the Fed’s Jul 25-26 policy meeting, which is likely to be another potential market catalyst. Investors widely expect a quarter percentage point hike in the interest rates at the conclusion of this meeting. With about 30% of the blue-chip S&P 500 stocks slated to report earnings this week, investors are likely to look for cues about the broader economy and the trajectory of future interest rate hikes.

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. AutoNation, Inc. AN, Suzano S.A. SUZ, Lockheed Martin Corporation LMT, Nexstar Media Group, Inc. NXST and CNH Industrial N.V. CNHI 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 20 stocks that qualified the screen:

AutoNation: Incorporated in Delaware in 1991, AutoNation is the largest automotive retailer in the United States. Apart from retailing new and used vehicles, the company offers vehicle maintenance and repair services, vehicle parts, extended service contracts, vehicle protection products and other aftermarket products. In addition, AutoNation arranges financing for vehicle purchases through third-party sources.

It has a VGM Score of A. The stock delivered a trailing four-quarter earnings surprise of 4.8%, on average. AutoNation carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

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 6.9% and delivered a trailing four-quarter earnings surprise of 54.8%, on average. It has a VGM Score of B. It sports a Zacks Rank #1.

Lockheed Martin: Headquartered in Bethesda, MD, Lockheed Martin is the largest defense contractor in the world. Its main areas of focus are in defense, space, intelligence, homeland security and information technology, including cyber security.

Lockheed Martin carries a Zacks Rank #2. It has a long-term earnings growth expectation of 6.5% and delivered a trailing four-quarter earnings surprise of 5%, on average. It has a VGM Score of B.

Nexstar Media: Headquartered in Irving, TX, Nexstar Media is a leading diversified media firm that produces and distributes engaging local and national news, sports and entertainment content across television, streaming and digital platforms. It also offers premium multiplatform and video-on-demand advertising opportunities at scale for businesses and brands seeking to leverage its strong client base.

The company has a long-term earnings growth expectation of 10% and delivered a trailing four-quarter earnings surprise of 21.4%, on average. Nexstar Media sports a Zacks Rank #1.

CNH Industrial: Headquartered in London, the United Kingdom, CNH Industrial is one of the leading equipment and services companies engaged in the manufacture and sale of agricultural and construction equipment. Currently, CNH Industrial has a commercial presence in approximately 180 countries.

The company delivered a trailing four-quarter earnings surprise of 13.4%, on average. CNH Industrial carries a Zacks Rank #2.

Lockheed Martin Corporation (LMT): Free Stock Analysis Report

AutoNation, Inc. (AN): Free Stock Analysis Report

Nexstar Media Group, Inc (NXST): Free Stock Analysis Report

CNH Industrial N.V. (CNHI): Free Stock Analysis Report

Suzano S.A. Sponsored ADR (SUZ): Free Stock Analysis Report

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