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Find Strong Stocks to Buy for a Possible Midterm Rally with this ROE Screen
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The stock market jumped to start the week, with a late afternoon rally capping off a solid Monday. Wall Street then utilized Tuesday morning to keep on buying stocks as voters headed to the polls. Investors appear excited about the potential for a divided Washington.
Midterm elections are historically bullish for stocks and the momentum appears to be back on the side of the bulls despite ongoing inflation and rising interest rates. The S&P 500 has climbed during the year period following every midterm election since 1942, averaging a 15% return.
Wall Street is temporarily turning its attention to the midterms. It should also be said that Wall Street doesn’t really care who is in power. In fact, average annual stock market returns during the Trump and Obama administrations were almost exactly the same.
On top of that, divided governments don’t hurt the market, which is a good thing since there has been a divided government roughly 70% of the time dating back to 1981. This has helped create the idea that gridlock is good for stocks because Wall Street favors the status quo over unknown political pursuits.
It is great to see the market bounce back over the last few weeks. But that likely doesn’t mean it’s time to dive headfirst back into beaten-down technology stocks and growth names.
Today, we explore how investors can utilize an ROE screen to find companies that have proven they can turn assets into profits. This is especially important as U.S. economic growth slows. The two stocks we highlight today have also outperformed the market in 2022.
ROE
Return on Equity or ROE helps investors understand if a firm’s executives are creating assets with investors’ cash or burning it. ROE shows a company’s ability to turn assets into profits. Put another way, this vital metric measures the profits made for each dollar of shareholder equity.
ROE is calculated as net income / shareholder's equity. For example: if $0.10 of assets are created for each $1 of shareholder equity that would equal a ROE of 10%.
Overall, Return on Equity is a great item to use regardless of what type of investor you are since it provides insight into management’s ability to create value and keep costs under control. Plus, if ROE slips, it can alert us to potential problems.
With all that said, let’s take a look at this screen’s parameters and see the companies proving they can return value to shareholders instead of churning through their cash…
• Zacks Rank equal to 1
The Zacks Rank looks at upward earnings estimate revisions, among other metrics, in order to find companies that are projected to see their earnings get stronger. In fact, beginning with a Zacks Rank #1 can be a great starting point because it boasts an average annual return of over 25% per year during the last 30 years.
• Price greater than or equal to 5
Today we ruled out any stocks that are trading for less than $5 a share because they can be more volatile and speculative.
• Price/Sales Ratio less than or equal to 1
On top of that, we are looking for a low price to sales ratio. Today we went with 1 or below as this range is usually thought to provide better value since investors pay less for each unit of sales.
• % (Broker) Rating Strong Buy equal to 100 (%)
In this screen, we decided to go with companies that brokers are fully on board with since ratings are typically skewed strongly toward ‘buy’ and ‘strong buy.’
• ROE greater than or equal to 10
Lastly, but most importantly for today’s screen, we got rid of any companies with Return on Equity of less than 10 because the median ROE value for all of the stocks in the Zacks Universe is under 10.
Here are two of the 10 stocks that made it through today’s screen…
Jabil is a manufacturing solutions provider and electronics maker. JBL topped our Q4 FY22 earnings estimates in late September on solid revenue expansion. More importantly, Jabil provided upbeat guidance in the face of mounting headwinds that have seen a large chunk of the market outside of oil and energy lower their outlooks. Plus, its Electronics - Manufacturing Services industry is in the top 1% of over 250 Zacks industries right now.
Jabil has paid a quarterly cash dividend since 2006 and it boasts a very sustainable 5% dividend payout ratio. This leaves it room to lift its payout in the future. JBL shares are up around 2% in the last year vs. its industry’s -35% drop.
Jabil stock has climbed 14% in the trailing six months to outshine its highly-ranked space’s 2% dip. The recent resilience during the market downturn helps JBL outpace the broader Zacks Tech sector over the last decade, up 265% vs. 170%. And yet it still trades at a 55% discount to the tech sector at 8.6X forward earnings, which also represents a 25% discount to its own decade-long median.
StoneX Group Inc. helps connect clients to the global markets ecosystem. The company provides institutional-grade market access, end-to-end clearing and execution, and high-touch expertise. SNEX operates in various areas such as metals, energy, meats/livestock, currencies, interest rates, securities, and beyond. StoneX makes money via commissions and spreads on trades and other transactions, as well as from fees for access to market intelligence and expertise, and interest earned on customer deposits.
SNEX shares have soared over 400% in the past decade vs. the wider Zacks Finance Market’s 60%. This includes a 31% climb in the last 12 months vs. the sector’s 16% decline. Even though it’s been on such a stellar run, the current Zacks consensus price target offers 10% upside to its levels at the moment. On top of that, StoneX trades at a 20% discount to the Finance sector and right in line with its industry at 10.9X forward earnings.
Get the rest of the stocks on this list and start looking for the newest companies that fit these criteria. It's easy to do. And it could help you find your next big winner. Start screening for these companies today with a free trial to the Research Wizard. You can do it.
Want more articles from this author? Scroll up to the top of this article and click the FOLLOW AUTHOR button to get an email each time a new article is published.
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.
Image: Bigstock
Find Strong Stocks to Buy for a Possible Midterm Rally with this ROE Screen
The stock market jumped to start the week, with a late afternoon rally capping off a solid Monday. Wall Street then utilized Tuesday morning to keep on buying stocks as voters headed to the polls. Investors appear excited about the potential for a divided Washington.
Midterm elections are historically bullish for stocks and the momentum appears to be back on the side of the bulls despite ongoing inflation and rising interest rates. The S&P 500 has climbed during the year period following every midterm election since 1942, averaging a 15% return.
Wall Street is temporarily turning its attention to the midterms. It should also be said that Wall Street doesn’t really care who is in power. In fact, average annual stock market returns during the Trump and Obama administrations were almost exactly the same.
On top of that, divided governments don’t hurt the market, which is a good thing since there has been a divided government roughly 70% of the time dating back to 1981. This has helped create the idea that gridlock is good for stocks because Wall Street favors the status quo over unknown political pursuits.
It is great to see the market bounce back over the last few weeks. But that likely doesn’t mean it’s time to dive headfirst back into beaten-down technology stocks and growth names.
Today, we explore how investors can utilize an ROE screen to find companies that have proven they can turn assets into profits. This is especially important as U.S. economic growth slows. The two stocks we highlight today have also outperformed the market in 2022.
ROE
Return on Equity or ROE helps investors understand if a firm’s executives are creating assets with investors’ cash or burning it. ROE shows a company’s ability to turn assets into profits. Put another way, this vital metric measures the profits made for each dollar of shareholder equity.
ROE is calculated as net income / shareholder's equity. For example: if $0.10 of assets are created for each $1 of shareholder equity that would equal a ROE of 10%.
Overall, Return on Equity is a great item to use regardless of what type of investor you are since it provides insight into management’s ability to create value and keep costs under control. Plus, if ROE slips, it can alert us to potential problems.
With all that said, let’s take a look at this screen’s parameters and see the companies proving they can return value to shareholders instead of churning through their cash…
• Zacks Rank equal to 1
The Zacks Rank looks at upward earnings estimate revisions, among other metrics, in order to find companies that are projected to see their earnings get stronger. In fact, beginning with a Zacks Rank #1 can be a great starting point because it boasts an average annual return of over 25% per year during the last 30 years.
• Price greater than or equal to 5
Today we ruled out any stocks that are trading for less than $5 a share because they can be more volatile and speculative.
• Price/Sales Ratio less than or equal to 1
On top of that, we are looking for a low price to sales ratio. Today we went with 1 or below as this range is usually thought to provide better value since investors pay less for each unit of sales.
• % (Broker) Rating Strong Buy equal to 100 (%)
In this screen, we decided to go with companies that brokers are fully on board with since ratings are typically skewed strongly toward ‘buy’ and ‘strong buy.’
• ROE greater than or equal to 10
Lastly, but most importantly for today’s screen, we got rid of any companies with Return on Equity of less than 10 because the median ROE value for all of the stocks in the Zacks Universe is under 10.
Here are two of the 10 stocks that made it through today’s screen…
Jabil (JBL - Free Report)
Jabil is a manufacturing solutions provider and electronics maker. JBL topped our Q4 FY22 earnings estimates in late September on solid revenue expansion. More importantly, Jabil provided upbeat guidance in the face of mounting headwinds that have seen a large chunk of the market outside of oil and energy lower their outlooks. Plus, its Electronics - Manufacturing Services industry is in the top 1% of over 250 Zacks industries right now.
Jabil has paid a quarterly cash dividend since 2006 and it boasts a very sustainable 5% dividend payout ratio. This leaves it room to lift its payout in the future. JBL shares are up around 2% in the last year vs. its industry’s -35% drop.
Jabil stock has climbed 14% in the trailing six months to outshine its highly-ranked space’s 2% dip. The recent resilience during the market downturn helps JBL outpace the broader Zacks Tech sector over the last decade, up 265% vs. 170%. And yet it still trades at a 55% discount to the tech sector at 8.6X forward earnings, which also represents a 25% discount to its own decade-long median.
StoneX Group Inc. (SNEX - Free Report)
StoneX Group Inc. helps connect clients to the global markets ecosystem. The company provides institutional-grade market access, end-to-end clearing and execution, and high-touch expertise. SNEX operates in various areas such as metals, energy, meats/livestock, currencies, interest rates, securities, and beyond. StoneX makes money via commissions and spreads on trades and other transactions, as well as from fees for access to market intelligence and expertise, and interest earned on customer deposits.
SNEX shares have soared over 400% in the past decade vs. the wider Zacks Finance Market’s 60%. This includes a 31% climb in the last 12 months vs. the sector’s 16% decline. Even though it’s been on such a stellar run, the current Zacks consensus price target offers 10% upside to its levels at the moment. On top of that, StoneX trades at a 20% discount to the Finance sector and right in line with its industry at 10.9X forward earnings.
Get the rest of the stocks on this list and start looking for the newest companies that fit these criteria. It's easy to do. And it could help you find your next big winner. Start screening for these companies today with a free trial to the Research Wizard. You can do it.
Click here to sign up for a free trial to the Research Wizard today.
Want more articles from this author? Scroll up to the top of this article and click the FOLLOW AUTHOR button to get an email each time a new article is published.
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/