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5 High ROE Stocks to Buy as Fed Aims to Control Inflation

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U.S. equity markets witnessed intense volatility over the past few days as concerns regarding the fast-spreading Omicron variant of the coronavirus and rising inflation induced a downtrend. However, the Fed’s decision to speed up the bond tapering process and hike interest rates thrice next year appeared to soothe investor nerves and propelled the stocks, partially offsetting the downtrend. The hawkish stance, primarily aimed to combat inflation, gave broad-based hints that the economic growth is well on track and does not require further Fed support. The pace of bond tapering would be doubled to $30 billion per month, bringing an end to the recurring asset purchases by March 2022. This would then follow three possible rate hikes to ease inflationary pressures.   

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 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.

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 19 stocks that qualified the screen:

Seagate Technology Holdings PLC (STX - Free Report) : Headquartered in Dublin, Ireland, Seagate is the second-largest manufacturer of hard disk drives in the United States. This Zacks #2 Ranked company has a long-term earnings growth expectation of 1.2%.

Seagate delivered a trailing four-quarter earnings surprise of 11.3%, on average.

Target Corporation (TGT - Free Report) : Minneapolis, MN-based Target has evolved from just being a pure brick-&-mortar retailer to an omni-channel entity. The company has been making investments in technologies, improving websites and mobile apps and modernizing the supply chain to keep pace with the changing retail landscape and better compete with pure e-commerce players.

Target delivered a trailing four-quarter earnings surprise of 19.7%, on average. This Zacks #2 Ranked company has a long-term earnings growth expectation of 14.4%.  

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 to fabricate semiconductor integrated circuits or chips.

The company delivered a trailing four-quarter earnings surprise of 6.5%, on average, and has a long-term earnings growth expectation of 16.2%. KLA carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

CBRE Group, Inc. (CBRE - Free Report) : Headquartered in Dallas, TX, CBRE is a commercial real estate services and investment firm, offering a wide range of services to tenants, owners, lenders and investors in office, retail, industrial, multi-family and other types of commercial real estates in all major metropolitan areas across the globe. With more than 100,000 employees, the company serves clients in above 100 countries.

This Zacks #1 Ranked company has a long-term earnings growth expectation of 11%. CBRE delivered a trailing four-quarter earnings surprise of 41%, on average.

Emerson Electric Co. (EMR - Free Report) : Headquartered in St. Louis, MO, Emerson is a diversified global engineering and technology company, with a presence in Europe, the Americas and Asia, the Middle East & Africa. It offers a wide range of products and services to customers in consumer, commercial and industrial markets.

Emerson delivered a trailing four-quarter earnings surprise of 10.7%, on average. This Zacks Rank #2 stock has a long-term earnings growth expectation of 8.7%.

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.