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5 Stocks With High ROE to Bet on as Markets Swing to Growth

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The U.S. equity markets bounced back from the recent downtrend witnessed over the past few days, driven by optimism surrounding President Biden’s tariff reconsideration against China and rising Treasury yields. The stock market rally put the leading benchmark indices back on the growth track after several consecutive weekly losses raised concerns regarding the overall impact of the oil prices’ volatility and the prolonged Russia-Ukraine war on the economy.

The U.S. President gave broad-based hints that he would reconsider eliminating some of the punitive trade barriers and import duties imposed by his predecessor against China. This is likely to kickstart a revival in business ties for a mutually beneficial bilateral trade relationship. The markets also seem to have factored in a steady rise in yields, with the Fed Chairman promulgating an aggressive monetary policy to tame the rising inflationary pressure.

After one of the biggest interest rate hikes since 2000 that put the federal funds rate in a range of 0.75-1%, the Fed aims to enforce similar increases in the remainder of the year to restore price stability. The central bank has 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.   

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) , APA Corporation (APA - Free Report) and Dillard's, Inc. (DDS - Free Report) are some of the stocks with high ROE to profit.

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 21 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 offers 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 7.1%. 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.

APA Corporation: Founded in 1954, Houston, TX-based APA Corporation is one of the world's leading independent energy companies engaged in the exploration, development and production of natural gas, crude oil and natural gas liquids. Region-wise, the company’s operations are in the United States, Egypt, and the United Kingdom's North Sea. APA also holds acreage in offshore Suriname (South America) and other international locations.   

This Zacks #2 Ranked company has a long-term earnings growth expectation of 26.5% and delivered a trailing four-quarter earnings surprise of 5.7%, on average. APA’s high-quality drilling inventory with greater resource potential should enable it to deliver competitive per share growth.

Dillard's, Inc.: Founded in 1938, Dillard's is a large departmental store chain featuring fashion apparel and home furnishings. Its merchandise mix consists of both branded and private-label items. The company’s strategy is to offer more fashion-forward and trendy products to attract customers.  

Dillard’s is benefiting from continued momentum in consumer demand and better inventory management. The company has a long-term earnings growth expectation of 14.6% and delivered a trailing four-quarter earnings surprise of 224.1%, on average. Dillard’s sports a Zacks Rank #1.

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.