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5 Stocks With High ROE to Buy as Rate Hike Fears Subside
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The U.S. equity markets inched up in the past few trading sessions as the December jobs report and contraction in the services sector instilled hopes that inflation was cooling. The latest nonfarm payrolls report showed that the U.S. economy added 223,000 jobs in December compared with broad-based expectations of 200,000 job additions, while wages increased 0.3%, contrary to expectations of a 0.4% rise. The ISM Services index recorded a reading of 49.6% for December, portraying contraction amid a pullback in new orders and production.
The economic indicators aroused hopes that the overall economy was contracting enough for the Fed to consider putting the brakes on its aggressive stance against inflation, fueling the stock market rally. Investors widely expect the New Year rally to continue in the short term, with the Fed being more dovish toward the rate hike regime. The Fed had increased its benchmark interest rates by half a percentage point in its last policy meeting to a targeted range between 4.25% and 4.5% and put the “terminal rate” to a target range of 5-5.25%
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. Jabil Inc. (JBL - Free Report) , PepsiCo, Inc. (PEP - Free Report) , DICK'S Sporting Goods, Inc. (DKS - Free Report) , Hologic, Inc. (HOLX - Free Report) and Suzano S.A. (SUZ - Free Report) are some of the stocks with high ROE to profit from.
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 16 stocks that qualified the screen:
Jabil: Headquartered in St. Petersburg, FL, Jabil is one of the largest global suppliers of electronic manufacturing services. The company offers electronics design, product management and after-market services to customers catering to aerospace, automotive, computing, consumer, defense, industrial, instrumentation, medical, networking, peripherals, storage and telecommunications industries.
It delivered a trailing four-quarter earnings surprise of 8.8%, on average, and has a long-term earnings growth expectation of 12%. It has a VGM Score of A. Currently, Jabil sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
PepsiCo: 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 4.5%, on average. Pepsi carries a Zacks Rank #2.
DICK'S Sporting: Founded in 1948 in New York, DICK’S Sporting operates as a major omni-channel sporting goods retailer, offering athletic shoes, apparel, accessories and a broad selection of outdoor and athletic equipment for team sports, fitness, camping, fishing, tennis, golf, water sports, etc. It owns Golf Galaxy and Field & Stream stores, as well as Team Sports HQ. DICK’S Sporting also operates all-in-one youth sports digital platform.
The company has a long-term earnings growth expectation of 5% and delivered a trailing four-quarter earnings surprise of 10.1%, on average. DICK’S Sporting carries a Zacks Rank #2.
Hologic: Headquartered in Bedford, MA, Hologic develops, manufactures and supplies diagnostics, medical imaging systems and surgical products that cater to the healthcare needs of women. The company is currently focusing on expanding its business across the patient continuum of care and has launched new software products based on its investments in artificial intelligence.
Hologic has a VGM Score of B. The company has a long-term earnings growth expectation of 15.2% and delivered a trailing four-quarter earnings surprise of 46.1%, on average. Hologic carries a Zacks Rank #2.
Suzano: Headquartered in Salvador, Brazil, Suzano produces and sells eucalyptus pulp and paper products. With more than 90 years of experience, this vertically integrated firm is one of the largest producers of paper and graphic products in South America.
Suzano has a long-term earnings growth expectation of 11.2% and delivered a trailing four-quarter earnings surprise of 53.8%, on average. It has a VGM Score of A. It 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.
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.
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5 Stocks With High ROE to Buy as Rate Hike Fears Subside
The U.S. equity markets inched up in the past few trading sessions as the December jobs report and contraction in the services sector instilled hopes that inflation was cooling. The latest nonfarm payrolls report showed that the U.S. economy added 223,000 jobs in December compared with broad-based expectations of 200,000 job additions, while wages increased 0.3%, contrary to expectations of a 0.4% rise. The ISM Services index recorded a reading of 49.6% for December, portraying contraction amid a pullback in new orders and production.
The economic indicators aroused hopes that the overall economy was contracting enough for the Fed to consider putting the brakes on its aggressive stance against inflation, fueling the stock market rally. Investors widely expect the New Year rally to continue in the short term, with the Fed being more dovish toward the rate hike regime. The Fed had increased its benchmark interest rates by half a percentage point in its last policy meeting to a targeted range between 4.25% and 4.5% and put the “terminal rate” to a target range of 5-5.25%
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. Jabil Inc. (JBL - Free Report) , PepsiCo, Inc. (PEP - Free Report) , DICK'S Sporting Goods, Inc. (DKS - Free Report) , Hologic, Inc. (HOLX - Free Report) and Suzano S.A. (SUZ - Free Report) are some of the stocks with high ROE to profit from.
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 16 stocks that qualified the screen:
Jabil: Headquartered in St. Petersburg, FL, Jabil is one of the largest global suppliers of electronic manufacturing services. The company offers electronics design, product management and after-market services to customers catering to aerospace, automotive, computing, consumer, defense, industrial, instrumentation, medical, networking, peripherals, storage and telecommunications industries.
It delivered a trailing four-quarter earnings surprise of 8.8%, on average, and has a long-term earnings growth expectation of 12%. It has a VGM Score of A. Currently, Jabil sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
PepsiCo: 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 4.5%, on average. Pepsi carries a Zacks Rank #2.
DICK'S Sporting: Founded in 1948 in New York, DICK’S Sporting operates as a major omni-channel sporting goods retailer, offering athletic shoes, apparel, accessories and a broad selection of outdoor and athletic equipment for team sports, fitness, camping, fishing, tennis, golf, water sports, etc. It owns Golf Galaxy and Field & Stream stores, as well as Team Sports HQ. DICK’S Sporting also operates all-in-one youth sports digital platform.
The company has a long-term earnings growth expectation of 5% and delivered a trailing four-quarter earnings surprise of 10.1%, on average. DICK’S Sporting carries a Zacks Rank #2.
Hologic: Headquartered in Bedford, MA, Hologic develops, manufactures and supplies diagnostics, medical imaging systems and surgical products that cater to the healthcare needs of women. The company is currently focusing on expanding its business across the patient continuum of care and has launched new software products based on its investments in artificial intelligence.
Hologic has a VGM Score of B. The company has a long-term earnings growth expectation of 15.2% and delivered a trailing four-quarter earnings surprise of 46.1%, on average. Hologic carries a Zacks Rank #2.
Suzano: Headquartered in Salvador, Brazil, Suzano produces and sells eucalyptus pulp and paper products. With more than 90 years of experience, this vertically integrated firm is one of the largest producers of paper and graphic products in South America.
Suzano has a long-term earnings growth expectation of 11.2% and delivered a trailing four-quarter earnings surprise of 53.8%, on average. It has a VGM Score of A. It 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.
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.