5 High ROE Stocks to Buy as Markets Recover After Fed-Induced Sell-Off
The broader equity markets staged a remarkable turnaround last week after a sharp decline due to the Federal Reserve-induced sell-off, as several key officials envisioned a possible rate hike as early as October. This led bond yields to surge despite the central bank leaving interest rates unchanged at a target range of 3.5% to 3.75% under new Chairman Kevin Warsh. However, the market was quick to reverse the trend, led by a strong rally from semiconductor stocks.
Investors now await the release of the personal consumption expenditures price index data for May to gauge a clearer picture of inflation amid uncertainty about the trajectory of monetary policy. 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, such as return on equity (ROE). A high ROE ensures that the company is reinvesting cash at a high rate of return. Ross Stores, Inc.ROST, TE Connectivity plcTEL, Bilbao Vizcaya Argentaria, S.A.BBVA, Globe Life Inc.GL and The Charles Schwab CorporationSCHW 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 less 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 assets, 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 16 stocks that qualified the screening:
Ross: Based in Dublin, CA, Ross is an off-price retailer of apparel and home accessories, offering in-season, branded and designer apparel, footwear, accessories and other home-related merchandise. Operating primarily in the United States, it targets middle-income households, keeping prices at generally 20% to 60% below the regular prices of most department and specialty stores.
The company has a long-term earnings growth expectation of 11.5% and delivered a trailing four-quarter earnings surprise of 10.2%, on average. Ross sports a Zacks Rank #1 at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
TE Connectivity: Based in Galway, Ireland, TE Connectivity is a global technology company that designs and manufactures connectivity and sensor solutions for a wide range of industries, including automotive, aerospace, defense, energy and medical. With operations in more than 130 countries, TE Connectivity focuses on emerging technologies such as 5G, electric vehicles, industrial automation and smart cities to position itself at the forefront of connectivity advancements.
The company has a long-term earnings growth expectation of 12.5%. It delivered a trailing four-quarter earnings surprise of 6%, on average. It has a VGM Score of B. TE Connectivity carries a Zacks Rank #2.
Banco Bilbao: Headquartered in Bilbao, Spain, Banco Bilbao provides retail banking, wholesale banking and asset management services primarily in Spain, Mexico, Turkey, the Rest of Europe, South America, the United States and Asia.
The company has a long-term earnings growth expectation of 16.9%. It delivered a trailing four-quarter earnings surprise of 4.5%, on average. Banco Bilbao carries a Zacks Rank #2.
Globe Life: Based in McKinney, TX, Globe Life is an insurance holding company that markets primarily individual life and supplemental health insurance to lower-middle to middle-income households throughout the United States. The company's insurance subsidiaries write a variety of non-participating ordinary life insurance products, which include traditional whole life, term life and other life insurance. Globe Life offers Medicare Supplement and limited-benefit supplemental health insurance products that include primarily critical illness and accident plans.
It delivered a trailing four-quarter earnings surprise of 1.1%, on average. Globe Life carries a Zacks Rank #2 at present.
Charles Schwab: Headquartered in Westlake, TX, Charles Schwab is a savings and loan holding company that provides wealth management, securities brokerage, banking, asset management, custody and financial advisory services. The company has nearly 400 branches across 48 states and the District of Columbia, as well as locations in Puerto Rico, the U.K., Hong Kong and Singapore.
The company has a long-term earnings growth expectation of 17.8%. It delivered a trailing four-quarter earnings surprise of 3.8%, on average. Charles Schwab carries a Zacks Rank #2.
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See Stocks Free >>This article originally published on Zacks Investment Research (zacks.com).
