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5 ROE Stocks to Buy as Markets Ride on Feel-Good Factor

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After ending 2020 at record highs despite the coronavirus setbacks, the U.S. equity markets continued the dream run in the New Year buoyed by the renewed optimism over the vaccine rollout. The markets were further driven by broad-based expectations of more pandemic aid under a Democrat-controlled Congress. With the Democratic Party wresting control over the Senate, the likelihood of increased stimulus and infrastructure spending in the upcoming months has jumped even higher. In addition, the official confirmation of Joe Biden and Kamala Harris as the next U.S. President and Vice President, respectively, by the Congress despite a brief uproar in the Capitol Hill contributed to the feel-good factor for the market.

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 companies 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 21 stocks that qualified the screen:

CommScope Holding Company, Inc. (COMM - Free Report) : Headquartered in Hickory, NC, CommScope is a premier provider of infrastructure solutions, including wireless and fiber optic solutions, for the core, access and edge layers of communication networks. This Zacks #2 Ranked company has a long-term earnings growth expectation of 2.7%. The company delivered a trailing four-quarter positive earnings surprise of 42.1%, on average.

Rockwell Automation, Inc. (ROK - Free Report) : Based in Milwaukee, WI, Rockwell Automation provides industrial automation and information solutions worldwide. The company delivered a trailing four-quarter positive earnings surprise of 12.7%, on average. The Zacks Rank #2 company has a long-term earnings growth expectation of 9.3%.

AGNC Investment Corp. (AGNC - Free Report) : AGNC Investment Corp. is a real estate investment trust (REIT) that focuses on leveraged investments in Agency MBS, including residential mortgage pass-through securities and collateralized mortgage obligations. This Zacks #2 Ranked company pulled off a trailing four-quarter positive earnings surprise of 19.4%, 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 11.6%.

D.R. Horton, Inc. (DHI - Free Report) : Based in Texas, D.R. Horton is one of the leading national homebuilders, primarily engaged in the construction and sale of single-family houses, both in the entry-level and move-up markets. The company delivered a trailing four-quarter positive earnings surprise of 21.6%, on average. This Zacks Rank #1 company has a long-term earnings growth expectation of 12.8%.

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.