Following an unimpressive fourth-quarter performance, the equity markets had a fresh lease of life after bilateral trade talks between the United States and China concluded on a positive note. With both sides showing efforts to resolve the trade differences as negotiations continue for a long-term solution, the stock market euphoria is likely to persist in the near future.

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.

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 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 fifteen 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 long-term earnings growth expectation of 7.3%. Progressive currently sports a Zacks Rank #1.

Celgene Corporation (CELG - Free Report): Summit, NJ-based Celgene is a biopharmaceutical company focused on the discovery, development, and commercialization of drugs targeting cancer and inflammatory diseases through next-generation solutions in protein homeostasis, immuno-oncology, epigenetic, immunology, and neuroinflammation. This Zacks #1 Ranked stock has a long-term earnings growth expectation of 22% with a trailing four-quarter average positive earnings surprise of 2.7%.  

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 20.5% and long-term earnings growth expectation of 8.5%.

Starbucks Corporation (SBUX - Free Report): Founded in 1985 and based in Seattle, WA, Starbucks is the leading roaster and retailer of specialty coffee in the world. It has a trailing four-quarter average positive earnings surprise of 6% and long-term earnings growth expectation of 12.8%. Currently, Starbucks sports a Zacks Rank #1.

CBRE Group, Inc. (CBRE - Free Report): Headquartered in Los Angeles, CBRE Group is a commercial real estate services and investment firm. It offers a wide range of services to tenants, owners, lenders and investors in office, retail, industrial, multi-family and other types of commercial real estates in all major metropolitan areas across the globe. The company has a trailing four-quarter average positive earnings surprise of 6.4% and long-term earnings growth expectation of 11%. Currently, CBRE Group carries a Zacks Rank #2.