Stocks fell sharply in afternoon trading on Tuesday, in a sign that coronavirus volatility is far from over. That said, Wall Street has largely been looking beyond the pandemic for roughly seven weeks now.
On top of that, economies around the world are slowly starting to reopen, which could boost market confidence. Plus, investors seem poised to remain in their ‘don’t fight the Fed’ mode. With all that said, investors still must be selective when buying stocks, especially during an unprecedented economic downturn.
So today we are looking for stocks by utilizing one of the quickest and best gauges of how effectively management runs a company: Return on Equity.
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 2.5 or higher • 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 3 of the stocks that made it through today’s screen…
Sportsmans Warehouse Holdings Inc (
SPWH Quick Quote SPWH - Free Report)
Silgan Holdings Inc. (
SLGN Quick Quote SLGN - Free Report)
GAIN Capital Holdings, Inc.
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/ Zacks' Super Screen It's hard to believe, even for us at Zacks. But from 2000-2019, while the market gained +6.0% per year, our top stock-picking strategy averaged +54.7% per year. How has that screen done lately? From 2017-2019, it quadrupled the market's +53.6% gain with a soaring +186.7% return. Free – See the Stocks It Turned Up for Today >>