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Buy 5 Stocks With High ROE as Markets Fall on Fed Rate Hike

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The U.S. equity markets witnessed a downtrend in the past couple of trading sessions, with the Fed Chairman announcing a rate hike of 50 basis points as part of an aggressive monetary policy to tame the rising inflationary pressure. This eroded the early gains buoyed by a strong earnings performance from hitherto reported companies and sent the market on a tailspin amid concerns regarding the overall impact of the oil prices’ volatility and prolonged Russia-Ukraine war on the economy.

The current rate hike is the biggest such increase since 2000 and has put the federal funds rate in a range of 0.75-1%. The Fed Chairman has even hinted at similar increases in the remainder of the year to restore price stability. The central bank also offered a broad outline of its reduction in asset holdings for monetary tightening. The Fed intends to reduce Treasury holdings and mortgage-backed securities by $30 billion and $17.5 billion, respectively, from June and extend the tallies to $65 billion and $35 billion after a period of three months. Meanwhile, the 10-year Treasury yield jumped to 3.12% and is inching closer to the 11-year high of 3.25% recorded in October 2018. Nevertheless, heightened uncertainty over the pace of monetary tightening and macroeconomic challenges kept the market on tenterhooks.   

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) , The Interpublic Group of Companies, Inc. (IPG - Free Report) , Public Storage (PSA - Free Report) , 3M Company (MMM - 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 24 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 and remodeling and outdoor structures.

Louisiana-Pacific delivered a trailing four-quarter earnings surprise of 14%, on average. It sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Interpublic Group of Companies, Inc.: New York-based Interpublic, together with its subsidiaries, provides advertising and marketing services worldwide. It provides multi-channel advertising and communications and marketing services such as meeting and event production, public relations, sports and entertainment marketing, corporate and brand identity and strategic marketing consulting to a broad list of customers in more than 110 countries.

The company has a long-term earnings growth expectation of 4.4% and delivered a trailing four-quarter earnings surprise of 26%, on average. Interpublic carries a Zacks Rank #2.

Public Storage: Glendale, CA-based Public Storage is a leading self-storage real estate investment trust in the United States. The company acquires, develops, owns and operates self-storage facilities, generally on a month-to-month basis for business and personal use. The company delivered a trailing four-quarter earnings surprise of 4.5%, on average.

Public Storage carries a Zacks Rank #2. The company has a long-term earnings growth expectation of 7.2%. The ‘Public Storage’ brand is the most recognized and established name in the self-storage industry, with a presence in all major metropolitan markets of the country.

3M Company: Headquartered in St. Paul, MN, and founded in 1902, 3M, together with its subsidiaries, operates as a diversified technology firm. It has manufacturing operations across the globe and serves a diversified customer base primarily in the United States, Europe, Middle East and Africa; Latin America/Canada; and the Asia Pacific regions.  

This Zacks #2 Ranked company has a long-term earnings growth expectation of 9.5% and delivered a trailing four-quarter earnings surprise of 13.8%, on average. 3M benefits from its exposure in multiple end markets and intends to become more competent on the back of product-portfolio solidification.

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.