Volatility persisted in the U.S. equity markets in 2018, with the year being dubbed the worst in a decade in terms of stock-market performance. While the Dow fell 5.6%, the S&P 500 Index and the Nasdaq Composite declined 6.2% and 3.9%, respectively. The intense market volatility was driven by a combination of several factors such as global economic slowdown, geopolitical concerns, monetary policy woes, inflation fears and uncertainties regarding increased regulation of the technology sector.

As investors employ a wait-and-see approach in a classic example of “backing and filling” in the market, they could benefit from ‘cash cow’ stocks that garner higher returns.

However, singling out cash-rich stocks alone does not make for a solid investment proposition unless these 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.

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 stocks 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.

Screening Parameters

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 eight stocks that qualified the screen:

The Progressive Corporation (PGR – Free Report) : Based in Mayfield Village, OH, Progressive is one of the major auto insurers in the country. Founded in 1965, the company is a leading independent agency writer of private passenger auto coverage. It has a trailing four-quarter average positive earnings surprise of 13.5% and long-term earnings growth expectation of 7.3%. Progressive currently has a Zacks Rank #2.

The Hershey Company (HSY – Free Report) : Based in Hershey, PA, Hershey is the largest chocolate manufacturer in North America as well as a global leader in chocolate and non-chocolate confectionery. This Zacks #2 Ranked stock has a long-term earnings growth expectation of 8.5%.

Lockheed Martin Corporation (LMT – Free Report) : Based in Bethesda, MD, Lockheed Martin Corporation is the largest defense contractor in the world. The company has a trailing four-quarter average positive earnings surprise of 13.9% and long-term earnings growth projection of 6%. Lockheed Martin has Zacks Rank #2, at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Facebook, Inc. (FB – Free Report) : Headquartered in Menlo Park, CA, Facebook Inc. helps in creating and fostering social networks through its web-based portal. It helps users exchange messages, post pictures, play social games, listen to music and interact with their favorite brands. The company has a trailing four-quarter average positive earnings surprise of 14.1% and long-term earnings growth expectation of 21.5%. Currently, Facebook carries a Zacks Rank #2.

General Motors Company (GM – Free Report) : Detroit, MI-based General Motors is a leading global automotive company, which is engaged in designing, building and selling cars, trucks, crossovers and automobile parts worldwide. This Zacks Rank #2 stock has a trailing four-quarter average positive earnings surprise of 21.8% and long-term earnings growth expectation of 8.5%.

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.

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