Banks Lead Market Rebound As Syria Fears Recede: 5 ROE Picks

Investors have been on the edge since Trump hinted at possibilities of missile attacks on Syria. As tensions gradually eased with the U.S. President clarifying that attacks (if at all) were not imminent, the market took a breather with bank stocks leading the rebound on solid earnings expectations.

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 rake in higher returns.

However, singling out cash-rich stocks alone does not make for 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 Metric

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.

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 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 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 11 stocks that qualified the screen:

Microchip Technology Incorporated (NASDAQ:MCHP) : Incorporated in Delaware in 1989, Microchip develops and manufacturers microcontrollers, memory and analog and interface products for embedded control systems, which are small, low-power computers designed to perform specific tasks. The company has a Zacks Rank #2. Microchip has a trailing four-quarter average positive earnings surprise of 5.3% and long-term earnings growth expectation of 14.6%.

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AMC Networks Inc. (NASDAQ:AMCX) : Headquartered in New York, NY, AMC Networks operates various cable television brands delivering content to audiences, and a platform to distributors and advertisers in the United States and internationally. The company has a trailing four-quarter average positive earnings surprise of 24.3% and long-term earnings growth expectation of 7.4%. AMC Networks sports a Zacks Rank #1. You can see Original post