All three major U.S. indexes jumped Tuesday, with the Nasdaq hitting new highs once again, driven by Apple (
AAPL Quick Quote AAPL - Free Report) , Amazon ( AMZN Quick Quote AMZN - Free Report) , and other giants. The climbs followed IHS Markit data that pointed to improving business activity in the U.S. private sector in June. Meanwhile, President Trump helped calm Wall Street nerves about growing trade tensions between the U.S. and China.
There are still nearly constant reports about spikes in coronavirus cases, as the U.S. economy continues to return to something as close to normal as some might have thought possible only three months removed from the initial lockdowns. The Nasdaq is now up 12% in 2020 and the S&P 500 has surged roughly 40% from its lows, as Wall Street continues to look ahead to the recovery.
Investors should also note that the market could remain in ‘don’t fight the Fed’ mode. That said, investors still need to hunt for stocks that are poised to weather the coronavirus 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 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 2 of the 4 stocks that made it through today’s screen…
Vistra Energy Corp. (
VST Quick Quote VST - Free Report)
Systemax Inc. (
SYX Quick Quote SYX - Free Report)
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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