The U.S. equity markets have witnessed a steady downtrend over the past few trading days while bond yields surged to historic highs as the pendulum gradually shifted to the less risky asset portfolio. The latest catalyst to the turn of events was the Federal Reserve’s stance to keep interest rates steady while keeping the road ajar for another hike before the end of the year. Moreover, indications of fewer cuts next year and ‘a higher-for-longer approach to interest rates’ have probably hastened the slide.
With relatively high inflation, consumers are hard hit by lower real wage levels and higher rates that have been raised 11 times in the past year and a half to a target range of 5.25% to 5.5% – the highest in more than 22 years. This apparently compounded investors’ fears related to market uncertainty and triggered a decline. Concerns regarding a probable government shutdown seemed to add to the woes as the federal lawmakers failed to reach a likely consensus to pass the government funding plans.
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. ON Semiconductor Corporation ON, Dillard’s, Inc. DDS, Ryder System, Inc. R, Upbound Group, Inc. UPBD and Atkore Inc. ATKR 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 19 stocks that qualified the screening:
ON Semiconductor: Phoenix, AZ-based onsemi is an original equipment manufacturer of a broad range of discrete and embedded semiconductor components. The company has a very well-diversified business. onsemi generates a significant percentage of revenues from the computing, consumer, industrial, communications and automotive markets.
The stock has a long-term earnings growth expectation of 7.5% and delivered a trailing four-quarter earnings surprise of 8.7%, on average. onsemi carries a Zacks Rank #2.
Dillard’s: Founded in 1938, Dillard’s is a large departmental store chain featuring fashion apparel and home furnishings. Its merchandise mix consists of both branded and private-label items. The company’s strategy is to offer more fashion-forward and trendy products to attract customers.
Dillard’s is benefiting from continued momentum in consumer demand and better inventory management. The company delivered a trailing four-quarter earnings surprise of 77.1%, on average. DDS sports a Zacks Rank #1.
Ryder: Florida-based Ryder is recognized as one of the world’s largest providers of integrated logistics and transportation solutions. Ryder’s customers range from small businesses to large international enterprises. They are drawn from a wide variety of industries, the most significant of which are automotive, electronics, transportation, grocery, lumber and wood products, food service and home furnishing.
Ryder sports a Zacks Rank #1. It delivered a trailing four-quarter earnings surprise of 11.2%, on average. It has a VGM Score of B.
Upbound Group: Headquartered in Plano, TX, Upbound Group (formerly Rent-A-Center, Inc.) is a leading lease-to-own provider with operations in the United States, Puerto Rico and Mexico. The company provides services to a large portion of consumers by providing them access and the opportunity to obtain ownership of high-quality, durable products under a flexible lease purchase agreement with no long-term debt obligation.
The company delivered a trailing four-quarter earnings surprise of 25.8%, on average. Upbound Group sports a Zacks Rank #1.
Atkore: Headquartered in Harvey, IL, Atkore offers conduits, cables and installation accessories in the United States and internationally. With a network of manufacturing and distribution facilities worldwide, Atkore is a leading provider of electrical, safety and infrastructure solutions.
Atkore carries a Zacks Rank #2. It delivered a trailing four-quarter earnings surprise of 22.3%, on average. It has a VGM Score of A.
Dillard’s, Inc. (DDS): Free Stock Analysis Report
Ryder System, Inc. (R): Free Stock Analysis Report
ON Semiconductor Corporation (ON): Free Stock Analysis Report
Atkore Inc. (ATKR): Free Stock Analysis Report
Upbound Group, Inc. (UPBD): Free Stock Analysis Report
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This article originally appeared on Zacks
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