The appeal for cash cows has been on the rise in recent weeks, given the current stock market volatility and uncertainty. Investors believe that “cash is king” in the current environment of persistent inflation, high interest rates, and a potential economic slowdown.
A cash cow is a company or a business unit in a mature, slow-growth industry. Cash cows have a large share of the market and require little investment. These companies achieve a commanding position within their industry and generate consistent free cash flow. They are the profit engines of a diversified portfolio, providing the resources required for other business units to grow and invest in new opportunities.
While there are several cash cow stocks, we have highlighted five of them having a Zacks Rank #1 (Strong Buy) or #2 (Buy). These include The Procter & Gamble Company PG, Amazon.com AMZN, Verizon Communications VZ, McKesson Corporation MCK and D.R. Horton Inc. DHI.
Key Characteristics of Cash Cow Companies
Steady Revenue Streams: Cash cows thrive in mature markets where demand has stabilized. Their products or services achieve widespread acceptance, resulting in a consistent revenue stream.
High Market Share: These companies typically have a dominant share of the market, often due to years of successful operations and brand establishment.
Operational Efficiency: Cash cows are known for their streamlined operations, efficient cost management and optimized production processes, which allow them to generate substantial profits with relatively lower expenses.
Strong Brand Identity: Building a strong brand identity over the years helps cash cow companies maintain customer loyalty and withstand market fluctuations.
Cash Generation: As the name suggests, these companies generate ample cash flow. This surplus cash can be reinvested into the business, used for dividends, or allocated to other ventures within the company’s portfolio.
Current Market Trends
After a solid first half, Wall Street lost momentum in the second half. Worries over longer-than-expected higher interest rates and a weakening Chinese economy have been weighing on investors’ sentiment.
Fed officials have signaled they are prepared to lift borrowing costs again if the economy and inflation don’t cool further. Both retail sales and inflation in the United States came in hotter than expected for August, suggesting resilience in the economy and persistent price pressure, making a case for more Fed rate hikes.
The latest data also showed that U.S. industrial production continued to expand in August, beating expectations, even though the pace of increase decelerated due to sluggish manufacturing growth. Last week, the United Auto Workers union officially launched a historic strike at select Big Three automaker plants after the failure of a new contract. This acted as the latest headwind in the stock market.
Stocks to Bet On
Procter & Gamble is a branded consumer products company, which markets its products in more than 180 countries primarily through mass merchandisers, grocery stores, membership club stores, drug stores, department stores, distributors, baby stores, specialty beauty stores, e-commerce, high-frequency stores and pharmacies.
With a market cap of $361.8 billion, the stock has an expected earnings growth rate of 8.1% for the fiscal year (ending June 2024). Procter & Gamble has a Zacks Rank #2.
Amazon.com is one of the largest e-commerce providers, with sprawling operations in North America, now spreading across the globe. It has a market cap of $1.5 billion and has an estimated earnings growth of 214.1%.
Amazon has a Zacks Rank #1 and a Growth Score of A.
Verizon offers communication services in the form of local phone service, long-distance, wireless and data services. The company is expected to post an earnings decline of 8.7% for this year.
With a market cap of $142 billion, Verizon has a Zacks Rank #2 and a Value Score of A.
McKesson is a healthcare services and information technology company. It has a market cap of $56.7 billion and has an estimated earnings growth of 4.2%.
McKesson has a Zacks Rank #2 and a VGM Score of A.
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. The company has an estimated earnings growth rate of 5.8% for the fiscal year ending September 2024.
With a market cap of $38 billion, D.R. Horton has a Zacks Rank #1 and a VGM Score of B.
Amazon.com, Inc. (AMZN): Free Stock Analysis Report
This article originally appeared on Zacks
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