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5 ROE Picks to Beat Market Blues Amid Surging Volatility
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The U.S. equity markets have witnessed intense volatility over the past couple of days with a mixed bag of quarterly performances from leading blue-chip companies. As the earnings season gradually picks up, investors will likely have a better picture about how the virus outbreak has dented the overall growth momentum of the economy. A few downbeat developments added to the cacophony, including lackluster U.S. consumer confidence data and lack of consensus regarding additional government stimulus for the pandemic. An estranged Sino-U.S. relationship that has ebbed on diplomatic ties has compounded the negative vibes, while rising cases of fresh coronavirus victims continue to dash hopes of early economic recovery.
As investors employ a wait-and-see approach in a classic example of “backing and filling” in the market, they can benefit from ‘cash cow’ stocks that garner higher returns. However, identifying cash-rich stocks alone does not make for a solid investment proposition unless it is backed by attractive efficiency ratios like return on equity (ROE). A high ROE ensures that the company is reinvesting cash at a high rate of return.
Why ROE?
ROE = Net Income/Shareholders’ Equity
ROE helps investors distinguish profit-generating companies from profit burners and is useful in determining the financial health of a company. In other words, this financial metric enables investors to identify stocks that diligently deploy cash for higher returns.
Moreover, ROE is often used to compare the profitability of a company with other firms in the industry — the higher, the better. It measures how well a company is multiplying its profits without investing new equity capital and portrays management’s efficiency in rewarding shareholders with attractive risk-adjusted returns.
Screening Parameters
In order to shortlist stocks that are cash-rich with high ROE, we have added Cash Flow greater than $1 billion and ROE greater than X-Industry as our primary screening parameters. In addition, we have taken a few other criteria into consideration to arrive at a winning strategy.
Price/Cash Flow lesser than X-Industry: This metric measures how much investors pay for $1 of free cash flow. A lower ratio indicates that investors need to pay less for a better cash flow-generating stock.
Return on Assets (ROA) greater than X-Industry: This metric determines how much profit a company earns for every dollar of asset, which includes cash, accounts receivable, property, equipment, inventory and furniture. The higher the ROA, the better it is for the company.
5-Year EPS Historical Growth greater than X-Industry: This criterion indicates that continued earnings momentum has translated into solid cash strength.
Zacks Rank less than or equal to 2: Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform irrespective of the market environment.
Here are five of the 22 stocks that qualified the screen:
Rockwell Automation, Inc. (ROK - Free Report) : Based in Milwaukee, WI, Rockwell provides industrial automation and information solutions worldwide. This Zacks #2 Ranked company has a VGM Score of B. The company has a trailing four-quarter earnings surprise of 10.6%, on average, and long-term earnings growth expectation of 5.4%
Best Buy Co., Inc. (BBY - Free Report) : Incorporated in 1966 and headquartered in Richfield, MN, Best Buy is a multinational specialty retailer of consumer electronics, home office products, entertainment software, communication, food preparation, wellness, heath, security, appliances and related services. The company has a trailing four-quarter earnings surprise of 21.6%, on average. The Zacks Rank #2 company has long-term earnings growth expectation of 8.2%.
T. Rowe Price Group, Inc. (TROW - Free Report) : Founded in 1937 and headquartered in Baltimore, T. Rowe is a global investment management organization that provides a broad array of mutual funds, sub-advisory services and separate account management for individual and institutional investors, retirement plans and financial intermediaries. The company has a trailing four-quarter earnings surprise of 4.8%, on average. It has a long-term earnings growth projection of 7.3%. T. Rowe sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Cadence Design Systems, Inc. (CDNS - Free Report) : Based in San Jose, CA, Cadence Design offers software, hardware, services and reusable IC design blocks to electronic systems and semiconductor customers. This Zacks #2 Ranked firm has a trailing four-quarter earnings surprise of 11.5%, on average. It has a long-term earnings growth projection of 13.7%.
TD Ameritrade Holding Corporation (AMTD - Free Report) : Founded in 1971 in California and headquartered in Omaha, NV, TD Ameritrade provides securities brokerage services and technology-based financial services to retail investors, traders, and independent registered investment advisors in the United States. The company has a trailing four-quarter earnings surprise of 8%, on average. This Zacks Rank #1 company has long-term earnings growth expectation of 7.6%.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
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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5 ROE Picks to Beat Market Blues Amid Surging Volatility
The U.S. equity markets have witnessed intense volatility over the past couple of days with a mixed bag of quarterly performances from leading blue-chip companies. As the earnings season gradually picks up, investors will likely have a better picture about how the virus outbreak has dented the overall growth momentum of the economy. A few downbeat developments added to the cacophony, including lackluster U.S. consumer confidence data and lack of consensus regarding additional government stimulus for the pandemic. An estranged Sino-U.S. relationship that has ebbed on diplomatic ties has compounded the negative vibes, while rising cases of fresh coronavirus victims continue to dash hopes of early economic recovery.
As investors employ a wait-and-see approach in a classic example of “backing and filling” in the market, they can benefit from ‘cash cow’ stocks that garner higher returns. However, identifying cash-rich stocks alone does not make for a solid investment proposition unless it is backed by attractive efficiency ratios like return on equity (ROE). A high ROE ensures that the company is reinvesting cash at a high rate of return.
Why ROE?
ROE = Net Income/Shareholders’ Equity
ROE helps investors distinguish profit-generating companies from profit burners and is useful in determining the financial health of a company. In other words, this financial metric enables investors to identify stocks that diligently deploy cash for higher returns.
Moreover, ROE is often used to compare the profitability of a company with other firms in the industry — the higher, the better. It measures how well a company is multiplying its profits without investing new equity capital and portrays management’s efficiency in rewarding shareholders with attractive risk-adjusted returns.
Screening Parameters
In order to shortlist stocks that are cash-rich with high ROE, we have added Cash Flow greater than $1 billion and ROE greater than X-Industry as our primary screening parameters. In addition, we have taken a few other criteria into consideration to arrive at a winning strategy.
Price/Cash Flow lesser than X-Industry: This metric measures how much investors pay for $1 of free cash flow. A lower ratio indicates that investors need to pay less for a better cash flow-generating stock.
Return on Assets (ROA) greater than X-Industry: This metric determines how much profit a company earns for every dollar of asset, which includes cash, accounts receivable, property, equipment, inventory and furniture. The higher the ROA, the better it is for the company.
5-Year EPS Historical Growth greater than X-Industry: This criterion indicates that continued earnings momentum has translated into solid cash strength.
Zacks Rank less than or equal to 2: Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform irrespective of the market environment.
Here are five of the 22 stocks that qualified the screen:
Rockwell Automation, Inc. (ROK - Free Report) : Based in Milwaukee, WI, Rockwell provides industrial automation and information solutions worldwide. This Zacks #2 Ranked company has a VGM Score of B. The company has a trailing four-quarter earnings surprise of 10.6%, on average, and long-term earnings growth expectation of 5.4%
Best Buy Co., Inc. (BBY - Free Report) : Incorporated in 1966 and headquartered in Richfield, MN, Best Buy is a multinational specialty retailer of consumer electronics, home office products, entertainment software, communication, food preparation, wellness, heath, security, appliances and related services. The company has a trailing four-quarter earnings surprise of 21.6%, on average. The Zacks Rank #2 company has long-term earnings growth expectation of 8.2%.
T. Rowe Price Group, Inc. (TROW - Free Report) : Founded in 1937 and headquartered in Baltimore, T. Rowe is a global investment management organization that provides a broad array of mutual funds, sub-advisory services and separate account management for individual and institutional investors, retirement plans and financial intermediaries. The company has a trailing four-quarter earnings surprise of 4.8%, on average. It has a long-term earnings growth projection of 7.3%. T. Rowe sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Cadence Design Systems, Inc. (CDNS - Free Report) : Based in San Jose, CA, Cadence Design offers software, hardware, services and reusable IC design blocks to electronic systems and semiconductor customers. This Zacks #2 Ranked firm has a trailing four-quarter earnings surprise of 11.5%, on average. It has a long-term earnings growth projection of 13.7%.
TD Ameritrade Holding Corporation (AMTD - Free Report) : Founded in 1971 in California and headquartered in Omaha, NV, TD Ameritrade provides securities brokerage services and technology-based financial services to retail investors, traders, and independent registered investment advisors in the United States. The company has a trailing four-quarter earnings surprise of 8%, on average. This Zacks Rank #1 company has long-term earnings growth expectation of 7.6%.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
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.