One of the historic realities of the equity market has been its relatively poor performance in the month of September. Statistics reveal that since 1950, the Dow Jones Industrial Average (DIA) and S&P 500 index (SPY) declined 1.1% and 0.7%, respectively, on an average in September, while Nasdaq  (QQQ) witnessed an average decline of 1% since it was established in 1971.

A string of events are scheduled for this dreaded month that could rattle the financial markets. Amid such adversities, investors are often on the lookout for ‘cash cow’ stocks that would enable them to rake in more 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 useful for 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 growing its profits without investing any new equity capital in the business and portrays management 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 added Cash Flow greater than $1 billion and ROE greater than X-Industry as our primary screening parameters. In addition, we take 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. 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 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 5 of the 11 stocks that qualified the screening:

Macy's, Inc. (M - Free Report) : Based in Cincinnati, OH, Macy’s is one of the leading department store retailers in the U.S., operating approximately 870 outlets under the names of Macy’s, Bloomingdale’s, Bloomingdale’s Outlet, Macy’s Backstage and Bluemercury. This Zacks Rank #2 stock has a decent long-term earnings growth expectation of 8.5% and a healthy trailing four-quarter average earnings surprise of 16.3%.

Discovery Communications, Inc. (DISCA - Free Report) : Headquartered in Silver Spring, MD, this Zacks Rank #1 stock operates as a global media firm with 3 billion subscribers in more than 220 countries. Discovery Communications offers high-quality content through global brands like Discovery Channel, TLC, Investigation Discovery, Animal Planet and Discovery Science. The stock has a strong trailing four-quarter average earnings surprise of 16.3%.

Zoetis Inc. (ZTS - Free Report) : 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 #2 stock has a solid long-term earnings growth expectation of 12.6% and a trailing four-quarter average earnings surprise of 15.9%.

Broadcom Limited (AVGO - Free Report) : Based in Singapore, Broadcom Limited is a premier designer, developer and global supplier of a broad range of analog semiconductor devices and digital, mixed-signal and optoelectronics components and subsystems. This Zacks Rank #2 stock has a trailing four-quarter average earnings surprise of 7% and long-term earnings growth expectation of 14.6%.

The Priceline Group Inc. (PCLN - Free Report) : Norwalk, CT-based Priceline is one of the largest online travel companies in the world. The company’s travel-related offerings cover hotel rooms, airline tickets, rental cars, vacation packages, cruises, “things to do” at customer destinations and travel insurance. This Zacks Rank #2 stock has a solid long-term earnings growth expectation of 18.3% and a trailing four-quarter average earnings surprise of 6.6%.