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Buy 5 High ROE Stocks as Markets Ride on Investor Optimism
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The broader U.S. equity markets witnessed an upward trajectory over the past few trading days in one of the longest winning streaks since the beginning of 2024, buoyed by the optimism regarding a probable interest rate cut by the Federal Reserve in the near future. With weaker-than-expected job growth per the April nonfarm payrolls report and moderating wage gains, investors are pricing in a second rate cut by the end of the year with a nearly 50% likelihood of a 25-basis point rate cut in September.
Recent data from the nonfarm payrolls report showed job additions of 175,000 in April, well below the broader expectations of 240,000, with wage figures coming in less than expected. This allayed investor fears that the economy was “overheating” or “reaccelerating.” In addition, the Middle East ceasefire with Hamas accepting an Egyptian-Qatari proposal to end the war with Israel boosted the stocks. The equity markets were also aided by Fed Chairman Jerome Powell's comments, which largely ruled out a central bank hike in its next policy meeting after holding the rates steady between 5.25% and 5.50% in May.
However, a preliminary reading for the University of Michigan’s consumer sentiment index for May came in at 67.4, well below the broader expectations of 76, signifying that the war against inflation was far from over. This, in turn, is likely to fuel skepticism as investors await further cues with April’s consumer price index reading slated for release this week.
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. Iron Mountain Incorporated (IRM - Free Report) , Suzano S.A. (SUZ - Free Report) , PulteGroup, Inc. (PHM - Free Report) , The TJX Companies, Inc. (TJX - 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.
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:
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.
It has a long-term earnings growth expectation of 4%. It delivered a trailing four-quarter earnings surprise of 2.6%, on average. Iron Mountain 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.
PulteGroup: Based in Atlanta, GA, PulteGroup engages in homebuilding and financial services businesses, primarily in the United States. The company conducts operations through two primary business segments – Homebuilding – which accounts for the lion’s share of revenues, and Financial Services.
PulteGroup has a long-term earnings growth expectation of 17.6% and delivered a trailing four-quarter earnings surprise of 12.5%, on average. This Zacks Rank #1 stock has a VGM Score of B.
The TJX Companies: Based in Framingham, MA, The TJX Companies is a leading off-price retailer of apparel and home fashions in the United States and worldwide. The company’s broad range of assortments at varying prices helps it reach a wide range of consumers. The TJX Companies has been able to distinguish itself from traditional retailers on the grounds of opportunistic buying strategies and a flexible business model.
The company has a long-term earnings growth expectation of 9.6% and delivered a trailing four-quarter earnings surprise of 6.3%, on average. It has a VGM Score of A. The TJX Companies carries a Zacks Rank #2.
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.
It has a long-term earnings growth expectation of 10%. It delivered a trailing four-quarter earnings surprise of 28.4%, on average. It has a VGM Score of B. Arch Capital 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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Buy 5 High ROE Stocks as Markets Ride on Investor Optimism
The broader U.S. equity markets witnessed an upward trajectory over the past few trading days in one of the longest winning streaks since the beginning of 2024, buoyed by the optimism regarding a probable interest rate cut by the Federal Reserve in the near future. With weaker-than-expected job growth per the April nonfarm payrolls report and moderating wage gains, investors are pricing in a second rate cut by the end of the year with a nearly 50% likelihood of a 25-basis point rate cut in September.
Recent data from the nonfarm payrolls report showed job additions of 175,000 in April, well below the broader expectations of 240,000, with wage figures coming in less than expected. This allayed investor fears that the economy was “overheating” or “reaccelerating.” In addition, the Middle East ceasefire with Hamas accepting an Egyptian-Qatari proposal to end the war with Israel boosted the stocks. The equity markets were also aided by Fed Chairman Jerome Powell's comments, which largely ruled out a central bank hike in its next policy meeting after holding the rates steady between 5.25% and 5.50% in May.
However, a preliminary reading for the University of Michigan’s consumer sentiment index for May came in at 67.4, well below the broader expectations of 76, signifying that the war against inflation was far from over. This, in turn, is likely to fuel skepticism as investors await further cues with April’s consumer price index reading slated for release this week.
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. Iron Mountain Incorporated (IRM - Free Report) , Suzano S.A. (SUZ - Free Report) , PulteGroup, Inc. (PHM - Free Report) , The TJX Companies, Inc. (TJX - 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.
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:
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.
It has a long-term earnings growth expectation of 4%. It delivered a trailing four-quarter earnings surprise of 2.6%, on average. Iron Mountain 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.
PulteGroup: Based in Atlanta, GA, PulteGroup engages in homebuilding and financial services businesses, primarily in the United States. The company conducts operations through two primary business segments – Homebuilding – which accounts for the lion’s share of revenues, and Financial Services.
PulteGroup has a long-term earnings growth expectation of 17.6% and delivered a trailing four-quarter earnings surprise of 12.5%, on average. This Zacks Rank #1 stock has a VGM Score of B.
The TJX Companies: Based in Framingham, MA, The TJX Companies is a leading off-price retailer of apparel and home fashions in the United States and worldwide. The company’s broad range of assortments at varying prices helps it reach a wide range of consumers. The TJX Companies has been able to distinguish itself from traditional retailers on the grounds of opportunistic buying strategies and a flexible business model.
The company has a long-term earnings growth expectation of 9.6% and delivered a trailing four-quarter earnings surprise of 6.3%, on average. It has a VGM Score of A. The TJX Companies carries a Zacks Rank #2.
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.
It has a long-term earnings growth expectation of 10%. It delivered a trailing four-quarter earnings surprise of 28.4%, on average. It has a VGM Score of B. Arch Capital 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.