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5 High ROE Stocks to Buy as Markets Retreat on China Tariff Stalemate
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Key Takeaways
Markets retreat on stalled China tariffs and Fed rate uncertainty after record highs last week.
DIS, TEL, FTNT, BBVA and ON screen high on ROE, cash flow and earnings surprise strength.
Stocks selected also show solid VGM Scores, long-term EPS growth and favorable Zacks Ranks.
Over the past couple of days, the broader equity market seemed to have hit the brakes after a winning run last week, whereby it attained uninterrupted record highs buoyed by strong quarterly earnings performance from hitherto-reported firms across all sectors. However, a stalemate in tariff-related negotiations with China forced the markets to retreat from the peaks, as no clear indications came from the White House regarding a potential extension of a pause on higher tariffs that is set to expire Aug. 12.
Moreover, uncertainty regarding probable interest rate cuts by the Federal Reserve gained steam with the policy meeting scheduled to take place later today. Investors now await further clarity on the Fed’s monetary policy, with the central bank likely to keep its benchmark unchanged at a range of 4.25% to 4.5%. 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, such as return on equity (ROE). A high ROE ensures that the company is reinvesting cash at a high rate of return. The Walt Disney Company (DIS - Free Report) , TE Connectivity plc (TEL - Free Report) , Fortinet, Inc. (FTNT - Free Report) , Banco Bilbao Vizcaya Argentaria, S.A. (BBVA - Free Report) and ON Semiconductor Corporation (ON - 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 12 stocks that qualified the screening:
Walt Disney: Burbank, CA-based Walt Disney has assets that span movies, television shows and theme parks. This leading diversified international family entertainment and media enterprise operates through three business segments — Entertainment, Sports and Experiences.
The company has a long-term earnings growth expectation of 11.8% and delivered a trailing four-quarter earnings surprise of 16.4%, on average. It has a VGM Score of B. Walt Disney carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
TE Connectivity: Based in Galway, Ireland, TE Connectivity is a global technology company that designs and manufactures connectivity and sensor solutions for a wide range of industries, including automotive, aerospace, defense, energy and medical. With operations in more than 130 countries, TE Connectivity focuses on emerging technologies such as 5G, electric vehicles, industrial automation and smart cities to position itself at the forefront of connectivity advancements.
TE Connectivity sports a Zacks Rank #1. The company has a long-term earnings growth expectation of 9.8% and delivered a trailing four-quarter earnings surprise of 4.9%, on average. It has a VGM Score of B.
Fortinet: Headquartered in Sunnyvale, CA, Fortinet is a provider of network security appliances and Unified Threat Management network security solutions to enterprises, service providers and government entities worldwide. Its solutions are designed to integrate multiple levels of security protection, including firewall, virtual private networking, antivirus, intrusion prevention, web filtering, anti-spam and wide area network acceleration.
The company has a long-term earnings growth expectation of 13.4% and delivered a trailing four-quarter earnings surprise of 23.8%, on average. Fortinet carries a Zacks Rank #2.
Banco Bilbao: Headquartered in Bilbao, Spain, Banco Bilbao provides retail banking, wholesale banking and asset management services primarily in Spain, Mexico, Turkey, the Rest of Europe, South America, the United States and Asia.
The company has a long-term earnings growth expectation of 6.9% and delivered a trailing four-quarter earnings surprise of 6.3%, on average. Banco Bilbao sports a Zacks Rank #1.
ON Semiconductor: Phoenix, AZ-based onsemi is an original equipment manufacturer of a broad range of discrete and embedded semiconductor components. The company has a well-diversified business. onsemi generates a significant percentage of revenues from the computing, consumer, industrial, communications and automotive markets.
The stock has a long-term earnings growth expectation of 5.3% and delivered a trailing four-quarter earnings surprise of 2.8%, on average. onsemi 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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5 High ROE Stocks to Buy as Markets Retreat on China Tariff Stalemate
Key Takeaways
Over the past couple of days, the broader equity market seemed to have hit the brakes after a winning run last week, whereby it attained uninterrupted record highs buoyed by strong quarterly earnings performance from hitherto-reported firms across all sectors. However, a stalemate in tariff-related negotiations with China forced the markets to retreat from the peaks, as no clear indications came from the White House regarding a potential extension of a pause on higher tariffs that is set to expire Aug. 12.
Moreover, uncertainty regarding probable interest rate cuts by the Federal Reserve gained steam with the policy meeting scheduled to take place later today. Investors now await further clarity on the Fed’s monetary policy, with the central bank likely to keep its benchmark unchanged at a range of 4.25% to 4.5%. 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, such as return on equity (ROE). A high ROE ensures that the company is reinvesting cash at a high rate of return. The Walt Disney Company (DIS - Free Report) , TE Connectivity plc (TEL - Free Report) , Fortinet, Inc. (FTNT - Free Report) , Banco Bilbao Vizcaya Argentaria, S.A. (BBVA - Free Report) and ON Semiconductor Corporation (ON - 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 12 stocks that qualified the screening:
Walt Disney: Burbank, CA-based Walt Disney has assets that span movies, television shows and theme parks. This leading diversified international family entertainment and media enterprise operates through three business segments — Entertainment, Sports and Experiences.
The company has a long-term earnings growth expectation of 11.8% and delivered a trailing four-quarter earnings surprise of 16.4%, on average. It has a VGM Score of B. Walt Disney carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
TE Connectivity: Based in Galway, Ireland, TE Connectivity is a global technology company that designs and manufactures connectivity and sensor solutions for a wide range of industries, including automotive, aerospace, defense, energy and medical. With operations in more than 130 countries, TE Connectivity focuses on emerging technologies such as 5G, electric vehicles, industrial automation and smart cities to position itself at the forefront of connectivity advancements.
TE Connectivity sports a Zacks Rank #1. The company has a long-term earnings growth expectation of 9.8% and delivered a trailing four-quarter earnings surprise of 4.9%, on average. It has a VGM Score of B.
Fortinet: Headquartered in Sunnyvale, CA, Fortinet is a provider of network security appliances and Unified Threat Management network security solutions to enterprises, service providers and government entities worldwide. Its solutions are designed to integrate multiple levels of security protection, including firewall, virtual private networking, antivirus, intrusion prevention, web filtering, anti-spam and wide area network acceleration.
The company has a long-term earnings growth expectation of 13.4% and delivered a trailing four-quarter earnings surprise of 23.8%, on average. Fortinet carries a Zacks Rank #2.
Banco Bilbao: Headquartered in Bilbao, Spain, Banco Bilbao provides retail banking, wholesale banking and asset management services primarily in Spain, Mexico, Turkey, the Rest of Europe, South America, the United States and Asia.
The company has a long-term earnings growth expectation of 6.9% and delivered a trailing four-quarter earnings surprise of 6.3%, on average. Banco Bilbao sports a Zacks Rank #1.
ON Semiconductor: Phoenix, AZ-based onsemi is an original equipment manufacturer of a broad range of discrete and embedded semiconductor components. The company has a well-diversified business. onsemi generates a significant percentage of revenues from the computing, consumer, industrial, communications and automotive markets.
The stock has a long-term earnings growth expectation of 5.3% and delivered a trailing four-quarter earnings surprise of 2.8%, on average. onsemi 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.