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5 ROE Stocks to Profit as Markets Soar on New Stimulus Hope

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The U.S. equity markets are currently trading near record-high territories on broad-based expectations that the Congress will approve President Biden’s proposed $1.9 trillion stimulus bill. The monetary and fiscal support is likely to provide added cushion to revitalize the economy against a slower-than-expected job addition amid the virus outbreak. In addition, declining cases of fresh COVID-19 infections and relatively healthy quarterly performance from hitherto reported companies have instilled market confidence.  

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:

CDW Corporation (CDW - Free Report) : Headquartered in Vernon Hills, IL, CDW Corporation is a leading provider of integrated information technology solutions to small, medium and large business, government, education and healthcare customers in the United States, United Kingdom and Canada. This Zacks #2 Ranked company has a long-term earnings growth expectation of 13.1%. The company delivered a trailing four-quarter positive earnings surprise of 11.1%, on average.

Apple Inc. (AAPL - Free Report) : Headquartered in Cupertino, CA, Apple’s business primarily runs around its flagship iPhone. The company also designs, manufactures and sells iPad, MacBook and HomePod that are powered by software applications including iOS, macOS, watchOS and tvOS operating systems. The company delivered a trailing four-quarter positive earnings surprise of 18.5%, on average, and has long-term earnings growth expectation of 11.5%. Apple currently sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

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. This Zacks #2 Ranked company pulled off a trailing four-quarter positive earnings surprise of 5.5%, on average. It has long-term earnings growth expectation of 11.8%.

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 8.3%, 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 25.8%, on average. This Zacks Rank #2 company has a long-term earnings growth expectation of 13.4%.

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.