Last Friday, the broader U.S. equity markets closed the sixth positive week on a trot. This marked the longest weekly advances year to date. However, after a three-day winning streak scripting record-high tallies, the markets witnessed a short-term pullback in price yesterday as concerns regarding higher-for-longer interest rates crept up. With the geopolitical unrest in the Middle East intensifying, crude oil prices bore the brunt of the market uncertainty as traders brace for more volatility slugfest.

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. Sysco Corporation SYY, CF Industries Holdings, Inc. CF, Snap-on Incorporated SNA, Ross Stores, Inc. ROST and Regions Financial Corporation RF are some of the stocks with high ROE to profit from.

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 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.

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 seven stocks that qualified the screening:

Sysco: Headquartered in Houston, TX, Sysco markets and distributes a range of food and related products primarily to the food service or food-away-from-home industry. The company’s distribution facilities are located across the United States, Bahamas, Canada, the Republic of Ireland and Northern Ireland.  

The company has a long-term earnings growth expectation of 8.4% and delivered a trailing four-quarter earnings surprise of 1.9%, on average. It has a VGM Score of A. Sysco carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here. 

CF Industries: Headquartered in Deerfield, IL, CF Industries is one of the largest manufacturers and distributors of nitrogenous fertilizer and other nitrogen products globally. The company’s principal nitrogenous fertilizer products are ammonia, granular urea, urea ammonium nitrate solution and ammonium nitrate. The company operates two of the largest fertilizer complexes in North America, one in Donaldsonville, LA, the United States and the other in Medicine Hat, Alberta, Canada.

It has a long-term earnings growth expectation of 6%. It has a VGM Score of B. CF Industries sports a Zacks Rank #1.

Snap-on: Headquartered in Kenosha, WI, Snap-on is a global provider of professional tools, equipment and related solutions for technicians, vehicle service centers, original equipment manufacturers (OEMs) and other industrial users. Products include a broad range of professional hand and power tools, vehicle diagnostics and service equipment, business management systems and other tool and equipment solutions.

It has a long-term earnings growth expectation of 7.6% and delivered a trailing four-quarter earnings surprise of 1.6%, on average. It has a VGM Score of B. Snap-on carries a Zacks Rank #2. 

Ross Stores: Based in Dublin, CA, Ross Stores operates as an off-price retailer of apparel and home accessories, primarily in the United States. The company operates its stores under the Ross Dress for Less (Ross) and dd’s DISCOUNTS names. The company’s stores are located mostly in community and neighborhood shopping centers in heavily populated urban and suburban areas.

The company has a long-term earnings growth expectation of 9.9% and delivered a trailing four-quarter earnings surprise of 9.1%, on average. It has a VGM Score of A. Ross Stores carries a Zacks Rank #2. 

Regions Financial: Birmingham, AL-based Regions Financial is a financial holding company that provides retail, commercial and mortgage banking, as well as other financial services in asset management, wealth management, securities brokerage, trust services, mergers and acquisitions (M&A) advisory services, and other specialty financing.

It has a long-term earnings growth expectation of 4.1% and delivered a trailing four-quarter earnings surprise of 4.4%, on average. Regions Financial carries a Zacks Rank #2.

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.

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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.