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Find 'Strong Buy' Stocks During the Market Comeback with this ROE Screen

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The stock market rebound that began in the middle of June crossed a significant milestone last Wednesday when investors officially sent the Nasdaq into a new bull market following the release of July’s consumer price index data. Wall Street seems to be betting that inflation is finally peaking, looking to the flat month-over-month movement from June and falling gas prices as reasons for optimism on the price front.  

Yields on the 10-year U.S. Treasury remain well off their mid-June highs, as Wall Street bets on an economic downturn and fading inflation that would allow Jay Powell and the Fed the chance to take their collective foot off the tightening pedal. Along with lower interest rates, which boost stock prices, the earnings outlook for the third quarter is holding up well and hardly showcases a major economic downturn.

The earnings and interest backdrop, coupled with eagerness to buy stocks perceived to be trading at deep discounts after the rough first half has seen Wall Street send the Nasdaq surging over 23% since the middle of June, with the S&P 500 up 17%.

The market positivity could remain and investors might want to be on the hunt for strong stocks to add in the back half of August and beyond.

Today, we explore how investors can utilize an ROE screen to find companies that have proven they can turn assets into profits, which is crucial if the U.S. economy is headed for a downturn.

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 12 stocks that made it through today’s screen…

Universal Logistics Holdings, Inc. (ULH - Free Report)

Universal Logistics’ subsidiaries provide a variety of customized transportation and logistics solutions in the U.S, Mexico, Canada, and Colombia. Universal Logistics’ offers services across the entire supply chain, including truckload, brokerage, intermodal, dedicated, and value-added services. Universal Logistics topped our second quarter earnings and revenue estimates on July 28, having reported new all-time record results, with revenue up 25% and adjusted earnings 78% higher.

Universal Logistics also lifted its outlook for FY22 and FY23 as its executive team remains confident its business will remain resilient in the face of economic slowdown fears. ULH’s adjusted earnings outlook has surged since its release and the firm has topped our quarterly EPS estimates by an average of 73% in the last four periods. Universal Logistics shares have soared 115% in 2022 to hit fresh highs. ULH has also been buying back shares and its dividend yields 1% at the moment.

Super Micro Computer (SMCI - Free Report)

Super Micro Computer is an application-optimized total IT solutions provider. Super Micro aims to deliver first to market innovations for enterprise, cloud, AI and 5G Telco/Edge IT Infrastructure, and beyond. Super Micro topped our Q4 FY22 earnings and revenue estimates on August 9. SMCI posted its fourth-straight bottom-line beat. More importantly, Super Micro offered impressive guidance and analysts have raced to up their earnings outlooks.

Zacks estimates call for Super Micro’s revenue to climb 19% in FY23 and another 15% in FY24 to help lift its adjusted earnings by 2% and 17%, respectively. Super Micro’s Computer- Storage Devices industry is in the top 30% of over 250 Zacks industries. Plus, its Zacks consensus price target offers 57% upside to its current price. The strong upside potential comes despite the fact that SMCI shares have surged 50% in 2022 and have outperformed the larger Zacks tech sector over the last decade, up 460% vs. 230%.    

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.

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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/


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