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Buy 5 Stocks With High ROE as Market Volatility Runs Amok
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The U.S. equity markets have witnessed intense market volatility over the past few trading days as an eight-day winning streak — the longest rally since November 2021 — was punctured by a sharp rise in bond yields. The uptrend was driven by the Federal Reserve’s stance to maintain the interest rates steady in the range of 5.25% to 5.5%.
The market was further buoyed by a soft monthly jobs report that revealed that non-farm payrolls improved by 150,000 in October compared with the consensus forecast of a rise of 170,000. The figure marked a sharp decline from 297,000 in September. The unemployment rate rose to 3.9%, the highest level since January 2022, with a significant decline in household employment.
However, with the Fed indicating that more groundwork was due to be done to bring down inflation to the targeted levels of 2%, bond yields began to rise and equity markets slid. The markets were pressed by uncertainty owing to the Fed’s stance to hold interest rates steady while keeping the door ajar for another hike before the end of the year. The latent threats related to geopolitical conflicts and unstable oil prices remained added concerns for the broader markets.
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. Microsoft Corporation (MSFT - Free Report) , Ryder System, Inc. (R - Free Report) , Iron Mountain Incorporated (IRM - Free Report) , PBF Energy Inc. (PBF - Free Report) and Arch Capital Group Ltd. (ACGL - 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 17 stocks that qualified the screening:
Microsoft: Redmond, WA-based Microsoft is one of the largest broad-based technology providers in the world. The company dominates the PC software market, with more than 73% of the market share for desktop operating systems. The company’s Microsoft 365 application suite is one of the most popular productivity software globally. It is also one of the prominent public cloud providers that can deliver a wide variety of infrastructure-as-a-service and platform-as-a-service solutions at scale.
The stock has a long-term earnings growth expectation of 13.5% and delivered a trailing four-quarter earnings surprise of 7.8%, on average. Microsoft has a VGM Score of B and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Ryder: Florida-based Ryder is recognized as one of the world's largest providers of integrated logistics and transportation solutions. Its customers range from small businesses to large international enterprises. They are drawn from a wide variety of industries, the most significant of which are automotive, electronics, transportation, grocery, lumber and wood products, food service and home furnishing.
Ryder delivered a trailing four-quarter earnings surprise of 7.6%, on average. This Zacks Rank #2 stock has a VGM Score of A.
Iron Mountain: Boston, MA-based Iron Mountain provides records & information management services and data center space & solutions in 59 countries. The company primarily generates revenues from storage rental and services. Storage rental revenues are generated through periodic rental charges for data storage. Service revenues comprise charges for related core service activities and a wide array of complementary products and services.
Iron Mountain carries a Zacks Rank #2. It has a long-term earnings growth expectation of 4% and delivered a trailing four-quarter earnings surprise of 2.1%, on average.
PBF Energy: Based in New jersey, PBF Energy is a leading refiner of crude. Through five oil refineries and associated infrastructure in the United States, the company provides end products that comprise heating oil, transportation fuels, lubricants and many related products. The refineries can collectively process 900,000 barrels of crude every day.
The company delivered a trailing four-quarter earnings surprise of 9.3%, on average. PBF Energy carries a Zacks Rank #2. It has a VGM Score of A.
Arch Capital: Headquartered in Pembroke, Bermuda, Arch Capital offers insurance, reinsurance and mortgage insurance across the world. It provides a wide range of products and services, which include primary and excess casualty coverages, professional indemnity, workers compensation and umbrella liability and employers’ liability insurance coverages. The company offers a full range of property, casualty and mortgage insurance and reinsurance lines while maintaining a focus on writing specialty lines of insurance and reinsurance.
Arch Capital carries a Zacks Rank #2. It has a long-term earnings growth expectation of 10%. It delivered a trailing four-quarter earnings surprise of 35.2%, on average. It has a VGM Score of A.
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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Buy 5 Stocks With High ROE as Market Volatility Runs Amok
The U.S. equity markets have witnessed intense market volatility over the past few trading days as an eight-day winning streak — the longest rally since November 2021 — was punctured by a sharp rise in bond yields. The uptrend was driven by the Federal Reserve’s stance to maintain the interest rates steady in the range of 5.25% to 5.5%.
The market was further buoyed by a soft monthly jobs report that revealed that non-farm payrolls improved by 150,000 in October compared with the consensus forecast of a rise of 170,000. The figure marked a sharp decline from 297,000 in September. The unemployment rate rose to 3.9%, the highest level since January 2022, with a significant decline in household employment.
However, with the Fed indicating that more groundwork was due to be done to bring down inflation to the targeted levels of 2%, bond yields began to rise and equity markets slid. The markets were pressed by uncertainty owing to the Fed’s stance to hold interest rates steady while keeping the door ajar for another hike before the end of the year. The latent threats related to geopolitical conflicts and unstable oil prices remained added concerns for the broader markets.
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. Microsoft Corporation (MSFT - Free Report) , Ryder System, Inc. (R - Free Report) , Iron Mountain Incorporated (IRM - Free Report) , PBF Energy Inc. (PBF - Free Report) and Arch Capital Group Ltd. (ACGL - 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 17 stocks that qualified the screening:
Microsoft: Redmond, WA-based Microsoft is one of the largest broad-based technology providers in the world. The company dominates the PC software market, with more than 73% of the market share for desktop operating systems. The company’s Microsoft 365 application suite is one of the most popular productivity software globally. It is also one of the prominent public cloud providers that can deliver a wide variety of infrastructure-as-a-service and platform-as-a-service solutions at scale.
The stock has a long-term earnings growth expectation of 13.5% and delivered a trailing four-quarter earnings surprise of 7.8%, on average. Microsoft has a VGM Score of B and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Ryder: Florida-based Ryder is recognized as one of the world's largest providers of integrated logistics and transportation solutions. Its customers range from small businesses to large international enterprises. They are drawn from a wide variety of industries, the most significant of which are automotive, electronics, transportation, grocery, lumber and wood products, food service and home furnishing.
Ryder delivered a trailing four-quarter earnings surprise of 7.6%, on average. This Zacks Rank #2 stock has a VGM Score of A.
Iron Mountain: Boston, MA-based Iron Mountain provides records & information management services and data center space & solutions in 59 countries. The company primarily generates revenues from storage rental and services. Storage rental revenues are generated through periodic rental charges for data storage. Service revenues comprise charges for related core service activities and a wide array of complementary products and services.
Iron Mountain carries a Zacks Rank #2. It has a long-term earnings growth expectation of 4% and delivered a trailing four-quarter earnings surprise of 2.1%, on average.
PBF Energy: Based in New jersey, PBF Energy is a leading refiner of crude. Through five oil refineries and associated infrastructure in the United States, the company provides end products that comprise heating oil, transportation fuels, lubricants and many related products. The refineries can collectively process 900,000 barrels of crude every day.
The company delivered a trailing four-quarter earnings surprise of 9.3%, on average. PBF Energy carries a Zacks Rank #2. It has a VGM Score of A.
Arch Capital: Headquartered in Pembroke, Bermuda, Arch Capital offers insurance, reinsurance and mortgage insurance across the world. It provides a wide range of products and services, which include primary and excess casualty coverages, professional indemnity, workers compensation and umbrella liability and employers’ liability insurance coverages. The company offers a full range of property, casualty and mortgage insurance and reinsurance lines while maintaining a focus on writing specialty lines of insurance and reinsurance.
Arch Capital carries a Zacks Rank #2. It has a long-term earnings growth expectation of 10%. It delivered a trailing four-quarter earnings surprise of 35.2%, on average. It has a VGM Score of A.
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.