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5 Stocks With High ROE as Inflation Stokes Rate Hike Fears

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The U.S. equity markets witnessed a sharp decline in the past few trading sessions that wiped off nearly all the recent rallies, as the August consumer price index report turned up with a higher-than-expected inflation reading. Despite a fall in gasoline prices, inflation rose 0.1% from July while core inflation was up 0.6% month over month. On a year-over-year basis, inflation was up 8.3%. Economists had broadly expected an 8.1% increase with a 0.3% rise in core inflation. This apparently annulled broad-based expectations of monetary easing and fueled speculations that the Fed is likely to announce a 75-basis point hike in interest rates for the third consecutive time in its next policy meeting scheduled next week to rein in inflationary pressure.

Investors would await further clarity regarding the future interest rate path and its likely impact on the economy as concerns with regard to recession refuse to abate. The central bank had earlier offered a broad outline of its reduction in asset holdings for monetary tightening. The Fed had indicated that it 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 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. The Interpublic Group of Companies, Inc. (IPG - Free Report) , PepsiCo, Inc. (PEP - Free Report) , Dillard's, Inc. (DDS - Free Report) , Suzano S.A. (SUZ - Free Report) and Triton International Limited (TRTN - Free Report) are some of the stocks with high ROE to profit from.

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 11 stocks that qualified the screen:

The Interpublic Group of Companies, Inc.: New York-based Interpublic 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 100 countries. The company focuses on point-to-point client interaction, which enables accurate decision-making and enhanced customer focus.

Interpublic delivered a trailing four-quarter earnings surprise of 14.3%, on average and has a long-term earnings growth expectation of 1.2%. Currently, IPG has a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

PepsiCo, Inc.: Headquartered in Purchase, NY, PepsiCo is one of the leading global food and beverage companies. Its complementary brands/businesses include Frito-Lay snacks, Pepsi-Cola beverages, Gatorade sports drinks, Tropicana juices and Quaker foods. The company serves customers in more than 200 countries and territories.

The company has a long-term earnings growth expectation of 7.7% and delivered a trailing four-quarter earnings surprise of 3.8%, on average. Pepsi carries a Zacks Rank #2.

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 delivered a trailing four-quarter earnings surprise of 215%, on average. DDS sports a Zacks Rank #1.

Suzano S.A.: Headquartered in Salvador, Brazil, Suzano produces and sells eucalyptus pulp and paper products. With over 90 years of experience, this vertically integrated firm is one of the largest producers of paper and graphic products in South America.  

The company has a long-term earnings growth expectation of 10.5% and delivered a trailing four-quarter earnings surprise of 46.7%, on average. Suzano sports a Zacks Rank #1.

Triton International Limited: Based in Hamilton, Bermuda, Triton is the largest lessor of intermodal containers (large steel boxes that are used for transporting freight by ship/rail/truck). The company also focuses on leasing chassis, which are used for transporting containers.

The company has a long-term earnings growth expectation of 10% and delivered a trailing four-quarter earnings surprise of 7.5%, on average. TRTN 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.

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