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Top 5 ROE Picks as Rising Infections Negate Vaccine Optimism

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The U.S. equity markets witnessed intense volatility in the past few trading sessions as healthy gains triggered by bullish test results of coronavirus vaccine candidates were erased by fresh cases of infections. The high efficacy rates in the trials infused positive vibes across the globe with broad-based expectations of the vaccine hitting the markets early next year. However, the euphoria was short lived as rising coronavirus cases forced strict lockdown measures by local administrative authorities, fueling speculations of a sedate overall economic growth.

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.

ROE: A Key Metric

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.

Parameters Used for Screening

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 25 stocks that qualified the screen:

The Sherwin-Williams Company (SHW - Free Report) : Founded in 1866 and headquartered in Cleveland, OH, The Sherwin-Williams Company manufactures paints, coatings and related products, primarily in the North and South America. It also has operations in the Caribbean region, Europe and Asia. This Zacks #2 Ranked company has a long-term earnings growth expectation of 10.3%. The company delivered a trailing four-quarter positive earnings surprise of 7.5%, on average.

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 delivered a trailing four-quarter positive earnings surprise of 33.5%, on average. The Zacks Rank #2 company has a long-term earnings growth expectation of 7.7%.

Lam Research Corporation (LRCX - Free Report) : Headquartered in Fremont, CA, Lam Research supplies wafer fabrication equipment and services to the semiconductor industry. This Zacks #2 Ranked company has a long-term earnings growth expectation of 16.5%. The company pulled off a trailing four-quarter earnings surprise of 6.9%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

KLA Corporation (KLAC - Free Report) : San Jose, CA-based KLA Corporation is an original equipment manufacturer of process diagnostics and control equipment and yield management solutions required for the fabrication of semiconductor integrated circuits or chips. The company delivered a trailing four-quarter positive earnings surprise of 8.9%, on average. This Zacks Rank #2 company has a long-term earnings growth expectation of 13.6%.

Whirlpool Corporation (WHR - Free Report) : Benton Harbor, MI-based Whirlpool Corporation, founded in 1955, is one of the largest manufacturers of home appliances in the world. The company delivered a trailing four-quarter positive earnings surprise of 70.3%, on average. This Zacks Rank #1 company has a long-term earnings growth expectation of 7.3%.

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.

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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.