We are into the second-quarter reporting cycle with corporate earnings hardly showing signs of growth for the S&P 500 index. Yet, results are improving sequentially and showing impressive beat ratios. Moreover, the U.S. equity market has sustained its Bull Run for the seventh consecutive year with stocks hovering around record high territory.

As investors scout for cherry pickings, they are often on the lookout for ‘cash cow’ stocks that would enable them to milk more cash or profits.

However, singling out cash-rich stocks alone does not make them a solid investment proposition unless they are backed by attractive efficiency ratios like return on equity (ROE). A high ROE ensures that the company is reinvesting its cash at a high rate of return.

ROE:  A Key Financial Metric

ROE = Net Income/Shareholders’ Equity

ROE helps investors distinguish between profit-generating companies from profit burners and is a useful tool for determining the financial health of a company. In other words, this financial metric enables investors to identify those stocks that diligently deploy cash for higher investor returns instead of piling up cash.

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 growing its profits without investing any new equity capital in the business and portrays management efficiency in rewarding shareholders with attractive risk-adjusted returns.

Screening Parameters

In order to shortlist stocks that are cash rich with high ROE, we added Cash Flow greater than $1 billion and ROE greater than X-Industry as our primary screening parameters. However, these are not the ultimate criteria for short listing stocks. As such, we have added a few additional criteria to arrive at a winning strategy.   

Price/Cash Flow less than X-Industry: This metric measures how much investors pay for one dollar 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 its assets, which include cash, accounts receivable, property, equipment, inventory and furniture. Of course, the higher the ROA, the better it is.

5 Year EPS Historical Growth greater than X-Industry: This criterion indicates that continued earnings momentum has translated to 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 5 of the 13 stocks that qualified the screening:

Macy's, Inc. M: Based in Cincinnati, OH, Macy’s is one of the leading department store retailers in the U.S., operating approximately 870 stores under the names of Macy’s, Bloomingdale’s, Bloomingdale’s Outlet, Macy’s Backstage and Bluemercury. This Zacks Rank #2 (Buy) stock has a decent long-term earnings growth expectation of 8.5% and a trailing four-quarter average earnings surprise of 3.9%.

General Mills, Inc. GIS: Based in Minneapolis, MN, General Mills is a global manufacturer and marketer of branded consumer foods sold through retail stores. The company also serves the foodservice and commercial baking industries. This Zacks Rank #2 stock has a healthy long-term earnings growth expectation of 7.8% and a trailing four-quarter average earnings surprise of 7.3%.

Zoetis Inc. ZTS: Founded in 1952 and headquartered in Florham Park, NJ, Zoetis manufactures and markets veterinary vaccines, medicines, diagnostic products and related services for livestock and companion animals across the globe. This Zacks Rank #1 (Strong Buy) stock has a solid long-term earnings growth expectation of 12.6% and a trailing four-quarter average earnings surprise of 16.4%.

Boston Scientific Corporation BSX: Headquartered in Natick, MA and founded in 1979, Boston Scientific manufactures medical devices and products used in various interventional medical specialties worldwide. This Zacks Rank #2 stock has a trailing four-quarter average earnings surprise of 6.3% and long-term earnings growth expectation of 10.7%.

Citrix Systems, Inc. CTXS: Headquartered in Fort Lauderdale, FL, Citrix offers an integrated portfolio of Workspace-as-a-Service, application delivery, virtualization, mobility, network delivery and file sharing solutions. This Zacks Rank #2 stock has a solid long-term earnings growth expectation of 12.2% and a trailing four-quarter average earnings surprise of 29.0%.

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.  

The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.

Click here to sign up for a free trial to the Research Wizard today.

 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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