Markets Volatile On Senate Tax Bill: 5 Top ROE Picks

The Senate Republicans followed the footsteps of the House of Representatives and managed to pass the tax bill, inching closer to a legislative tax overhaul centered on President Trump’s electoral promise. With corporate taxes likely to come down from 35% to 20%, expectations of higher corporate earnings and dividend payouts are likely to drive stocks. However, the houses need to reconcile to craft a joint bill for it to become a law.

While Dow scaled a record high on the news, other markets closed relatively lower on tech sector woes. 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 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.

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.

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.

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Here are five of the 13 stocks that qualified the screen:

Monsanto Company (NYSE:MON) : Missouri-based Monsanto is a leading global provider of agricultural products. The company has a stellar trailing four-quarter average positive earnings surprise of 244.8% and long-term earnings growth expectation of 12.1%. Monsanto carries a Zacks Rank #2.

International Consolidated Airlines Group (LON:ICAG), S.A. (OTC:ICAGY) : Based in Madrid, Spain, International Consolidated Airlines Group operates as the holding company for British Airways and Iberia, providing scheduled passenger and cargo airline services to more than 300 destinations worldwide. This Zacks Rank #1 company has a long-term earnings growth projection of 5%. You can see Original post

Written By: Zacks Investment Research