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Find 'Strong Buy' Stocks as Inflation Lingers with this ROE Screen

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Stocks whipsawed through morning trading Tuesday after the release of the highly-anticipated January CPI data. Inflation did indeed show signs of continued cooling last month, but the figures came in slightly higher than some Wall Street estimates.

The report threw a bit of cold water on the red-hot market as investors are forced to once again recalibrate their outlook on inflation and the Fed’s fight against rising prices.

January’s consumer-price index came in at 6.4% vs. the 6.2% estimate, while Core CPI, which strips out food and energy prices, climbed 5.6% YoY vs. the 5.4% projection. The January figures still marked the seventh-straight monthly deceleration after inflation hit 9.1% in June, but Wall Street is a bit worried about the ongoing monthly climbs (0.5% in Jan. vs 0.1% in Dec.).

The largely stellar start to 2023 has seemingly been based on the premise that the Fed’s inflation fight is over and that earnings will bottom out in short order. Anything that runs counter to this thesis could lead to more selling.

Wall Street did already spend a year pricing in higher interest rates and fading earnings, so it isn’t a huge surprise that investors are jumping back into stocks as they look ahead to an eventual Fed pivot and a return to earnings growth.

Some investors might be ready to start buying growth-focused stocks again. But it might be an even better time to go with companies that have proven they can turn assets into profits amid the ongoing economic uncertainties.

Today, we explore how investors can utilize an ROE screen to find “Strong Buy” stocks for February and beyond…


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 is one of the roughly dozen stocks that made it through today’s screen…

Modine Manufacturing ((MOD - Free Report) )

Modine Manufacturing is a standout in the thermal management technology and solutions space. Modine’s climate solutions and performance technologies segments aim to help improve air quality, as well as reduce energy and water consumption. Modine’s offerings also help lower what it calls “harmful emissions” to enable “cleaner running vehicles and environmentally friendly refrigerants.”

Modine shares have climbed 165% in the last three years to crush its industry’s 50% decline and the S&P 500’s 23% run. MOD stock has also doubled the market YTD and yet it still trades roughly 15% below its current Zacks price target at around $22.91 per share.

Even though it has easily outperformed its industry, Modine shares trade at a 50% discount to the average at 9.2X forward earnings. This also represents a 40% discount to its own three-year highs.

Zacks estimates call for Modine’s revenue to climb 11.4% in its fiscal 2023 and another 4.5% in FY24. Meanwhile, its adjusted earnings are projected to soar 43% and 47%, respectively over this stretch. MOD has also beaten our adjusted earnings estimates by an average of 56% over the trailing four periods.

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.

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