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5 Stocks With High ROE to Bet on as Fed Pledges to Act Tough

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In the past couple of trading sessions, the U.S. equity markets went downhill as the Fed officials gave broad-based hints of an aggressive monetary policy in the imminent future. The hawkish stance appears to be an all-out attempt to tame the rising inflationary pressures, with the tightening cycle likely to be initiated as early as the next month. This, in turn, sent shockwaves across the broader investor community amid concerns regarding a slowing economy.

With recessionary fears spooking markets, the 10-year Treasury yield jumped to 2.56% - hitting the highest level since May 2019. Of late, the bond market has been flashing signals of potential recession with yield curve inversion for 5-year and 30-year Treasury rates. Although it is too early to predict an economic downturn later in 2023, the aggressive hike in interest rates and high inflation put the odds in favor of it.  

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. Louisiana-Pacific Corporation (LPX - Free Report) , D.R. Horton, Inc. (DHI - Free Report) , Steel Dynamics, Inc. (STLD - Free Report) , Expeditors International of Washington, Inc. (EXPD - Free Report) and Target Corporation (TGT - Free Report) are some of the stocks with high ROE to profit.

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 34 stocks that qualified the screen:

Louisiana-Pacific Corporation: Headquartered in Nashville, TN, Louisiana-Pacific is a leading manufacturer of sustainable, quality engineered wood building materials, structural framing products and exterior siding for use in residential, industrial and light commercial construction. The company’s products are used primarily in new home construction, repair as well as remodeling and outdoor structures.

Louisiana-Pacific delivered a trailing four-quarter earnings surprise of 13.3%, on average. It sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

D.R. Horton, Inc.: Based in Texas, D.R. Horton is one of the leading national homebuilders, primarily engaged in the construction and sale of single-family houses in the entry-level and move-up markets. Its operations are spread across 102 markets in 32 states in the East, Midwest, Southeast, South Central, Southwest and West regions of the United States.

The company has a long-term earnings growth expectation of 10.5% and delivered a trailing four-quarter earnings surprise of 11.3%, on average. D. R. Horton carries a Zacks Rank #2.

Steel Dynamics, Inc.: Based in Fort Wayne, IN, Steel Dynamics is among the leading steel producers and metal recyclers in the United States. It currently has a steelmaking and coating capacity of more than 11 million tons. The company delivered a trailing four-quarter earnings surprise of 2.1%, on average.

Steel Dynamics sports a Zacks Rank #1. Its customer-focused approach, market diversification and low-cost operating platforms positions it well for future growth opportunities.

Expeditors International of Washington, Inc.: Based in Seattle, WA, Expeditors is a leading third-party logistics provider. The company is engaged in the business of global logistics management, including international freight forwarding and consolidation, for both air and ocean freight.

This Zacks #1 Ranked company delivered a trailing four-quarter earnings surprise of 34.2%, on average. Expeditors is gaining from the uptick in airfreight revenues and is well poised for the post-pandemic market revival.

Target Corporation: Founded in 1902, Target provides an array of goods ranging from household essentials and electronics to toys and apparel for men, women and kids. It also houses food and pet supplies, home furnishings and décor, home improvement, automotive products and seasonal merchandise.

Target has evolved from just being a pure brick-&-mortar retailer to an omni-channel entity. The company has a long-term earnings growth expectation of 16.5% and delivered a trailing four-quarter earnings surprise of 21.3%, on average. Target carries a Zacks Rank #2.

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.