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Buy 5 High ROE Stocks as Markets Swing on Volatility Woes
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Over the past few trading days, the broader U.S. equity markets have witnessed a roller-coaster ride as stocks recovered significantly from a brutal sell-off that was triggered by Federal Reserve chairman Jerome Powell hinting at the unlikelihood of a rate cut in March.
Despite healthy inflation data, with the Commerce Department’s personal consumption expenditures price index for December being up 0.2% month-over-month and 2.9% on a year-over-year basis, Powell indicated that more encouraging data was required to establish the decelerating inflation trend and warrant a rate cut.
This caused a sudden downslide, with leading benchmark indices recording one of their worst performances in recent months. To add to the woes, Federal Reserve Governor Christopher Waller indicated that the easing of monetary policy might come slower than anticipated, although the Fed had earlier pledged to cut interest rates several times in 2024 owing to a slowdown in inflation in the later stages of 2023. The recent commentaries that appeared in stark contrast apparently stirred investor nerves.
However, the markets recovered sharply on the following day with solid quarterly earnings from blue-chip firms like Apple, Meta and Amazon. The recent GDP data further revealed that the U.S. economy grew at 3.3% in the fourth quarter compared with broad-based expectations of a 2% rise. This portrays continued economic resiliency despite turbulent geopolitical conditions in the Middle East.
The December non-farm payrolls report also showed that the jobless rate held steady at 3.7%, while the economy added 216,000 jobs compared with 173,000 revised job additions in November, signifying economic strength. However, the recent Fed commentaries portray that the markets need to brace for intense volatility owing to tempered expectations.
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. NRG Energy, Inc. (NRG - Free Report) , Suzano S.A. (SUZ - Free Report) , Arch Resources, Inc. (ARCH - Free Report) , Cboe Global Markets, Inc. (CBOE - Free Report) and Jabil Inc. (JBL - 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.
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 15 stocks that qualified the screening:
NRG Energy: Headquarters in Houston, TX, NRG Energy is engaged in the production, sale and delivery of energy and energy products and services to residential, industrial and commercial consumers in major competitive power markets in the United States. The company also provides system power, distributed generation, renewable products, backup generation, energy efficiency and advisory services, as well as carbon management and specialty services.
The stock has a long-term earnings growth expectation of 13.8% and delivered a trailing four-quarter earnings surprise of 4.7%, on average. NRG Energy carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
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.
The company offers coated and uncoated printing and writing papers, paperboards, tissue papers and lignin. Suzano sports a Zacks Rank #1.
Arch Resources: St. Louis, MO-based Arch Resources is one of the largest coal producers in the United States, operating nine mines across the major coal basins of the country. The prime location of its mines and easy access to export facilities enable the company to ship coal worldwide.
Arch Resources delivered a trailing four-quarter earnings surprise of 24.5%, on average. It has a VGM Score of A. It sports a Zacks Rank #1.
Cboe Global Markets: Based in Chicago, IL, Cboe Global Markets is one of the largest stock exchange operators by volume in the United States and a leading market globally for ETP trading. It offers trading across a diverse range of products in multiple asset classes and regions, including options, futures, U.S. and European equities, ETPs, global foreign exchange and multi-asset volatility products based on the VIX Index.
The company has a long-term earnings growth expectation of 12.8% and delivered a trailing four-quarter earnings surprise of 4.1%, on average. It has a VGM Score of B. Cboe Global Markets carries a Zacks Rank #2.
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 4.1%, on average, and has a long-term earnings growth expectation of 12%. It has a VGM Score of A. Currently, Jabil 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.
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 High ROE Stocks as Markets Swing on Volatility Woes
Over the past few trading days, the broader U.S. equity markets have witnessed a roller-coaster ride as stocks recovered significantly from a brutal sell-off that was triggered by Federal Reserve chairman Jerome Powell hinting at the unlikelihood of a rate cut in March.
Despite healthy inflation data, with the Commerce Department’s personal consumption expenditures price index for December being up 0.2% month-over-month and 2.9% on a year-over-year basis, Powell indicated that more encouraging data was required to establish the decelerating inflation trend and warrant a rate cut.
This caused a sudden downslide, with leading benchmark indices recording one of their worst performances in recent months. To add to the woes, Federal Reserve Governor Christopher Waller indicated that the easing of monetary policy might come slower than anticipated, although the Fed had earlier pledged to cut interest rates several times in 2024 owing to a slowdown in inflation in the later stages of 2023. The recent commentaries that appeared in stark contrast apparently stirred investor nerves.
However, the markets recovered sharply on the following day with solid quarterly earnings from blue-chip firms like Apple, Meta and Amazon. The recent GDP data further revealed that the U.S. economy grew at 3.3% in the fourth quarter compared with broad-based expectations of a 2% rise. This portrays continued economic resiliency despite turbulent geopolitical conditions in the Middle East.
The December non-farm payrolls report also showed that the jobless rate held steady at 3.7%, while the economy added 216,000 jobs compared with 173,000 revised job additions in November, signifying economic strength. However, the recent Fed commentaries portray that the markets need to brace for intense volatility owing to tempered expectations.
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. NRG Energy, Inc. (NRG - Free Report) , Suzano S.A. (SUZ - Free Report) , Arch Resources, Inc. (ARCH - Free Report) , Cboe Global Markets, Inc. (CBOE - Free Report) and Jabil Inc. (JBL - 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.
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 15 stocks that qualified the screening:
NRG Energy: Headquarters in Houston, TX, NRG Energy is engaged in the production, sale and delivery of energy and energy products and services to residential, industrial and commercial consumers in major competitive power markets in the United States. The company also provides system power, distributed generation, renewable products, backup generation, energy efficiency and advisory services, as well as carbon management and specialty services.
The stock has a long-term earnings growth expectation of 13.8% and delivered a trailing four-quarter earnings surprise of 4.7%, on average. NRG Energy carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
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.
The company offers coated and uncoated printing and writing papers, paperboards, tissue papers and lignin. Suzano sports a Zacks Rank #1.
Arch Resources: St. Louis, MO-based Arch Resources is one of the largest coal producers in the United States, operating nine mines across the major coal basins of the country. The prime location of its mines and easy access to export facilities enable the company to ship coal worldwide.
Arch Resources delivered a trailing four-quarter earnings surprise of 24.5%, on average. It has a VGM Score of A. It sports a Zacks Rank #1.
Cboe Global Markets: Based in Chicago, IL, Cboe Global Markets is one of the largest stock exchange operators by volume in the United States and a leading market globally for ETP trading. It offers trading across a diverse range of products in multiple asset classes and regions, including options, futures, U.S. and European equities, ETPs, global foreign exchange and multi-asset volatility products based on the VIX Index.
The company has a long-term earnings growth expectation of 12.8% and delivered a trailing four-quarter earnings surprise of 4.1%, on average. It has a VGM Score of B. Cboe Global Markets carries a Zacks Rank #2.
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 4.1%, on average, and has a long-term earnings growth expectation of 12%. It has a VGM Score of A. Currently, Jabil 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.