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Buy 5 Stocks With High ROE as Markets Hit Record High on Likely Truce
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Key Takeaways
Record-high rally on truce hopes has investors eyeing high-ROE "cash cow" stocks for returns.
Screen targets firms with cash flow more than $1B, ROE above industry, plus strong ROA and 5-year EPS growth.
ROST, TEL, AVGO, GLW and ANET are five picks highlighted as qualifying the high-ROE, cash-rich screen.
The broader equity markets witnessed one of the longest rallies since 2009 as the uptrend continued over the past few days, with benchmark indices hitting fresh all-time highs that wiped out the losses stemming from the Iran war. The uptrend was largely buoyed by optimism regarding a likely truce deal between the United States and Iran, despite no breakthrough in the initial discussions. With investors pinning hopes on a possible win-win deal between the two warring parties as negotiations continued amid a 10-day ceasefire between Israel and Lebanon, markets were further propelled by a relatively healthy start to the earnings season.
President Trump has also indicated that the Iran war is “very close to over,” with markets pricing in some volatility due to the impact of the war on the U.S. economy. 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. Ross Stores, Inc. (ROST - Free Report) , TE Connectivity plc (TEL - Free Report) , Broadcom Inc. (AVGO - Free Report) , Corning Incorporated (GLW - Free Report) and Arista Networks, Inc. (ANET - 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 less 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 assets, 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 screening:
Ross: Based in Dublin, CA, Ross is an off-price retailer of apparel and home accessories, offering in-season, branded and designer apparel, footwear, accessories and other home-related merchandise. Operating primarily in the United States, it targets middle-income households, keeping prices at generally 20% to 60% below the regular prices of most department and specialty stores.
The company has a long-term earnings growth expectation of 10% and delivered a trailing four-quarter earnings surprise of 6.2%, on average. It has a VGM Score of B. Ross carries a Zacks Rank #2 at present. 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.
The company has a long-term earnings growth expectation of 12.5%. It delivered a trailing four-quarter earnings surprise of 7.5%, on average. It has a VGM Score of A. TE Connectivity carries a Zacks Rank #2.
Broadcom: Headquartered in San Jose, CA, Broadcom develops a broad range of semiconductor solutions for enterprise and data center networking, home connectivity, set-top boxes, broadband access, telecommunication equipment, smartphones and base stations, data center servers and storage systems, factory automation, power generation and alternative energy systems, and electronic displays.
The company has a long-term earnings growth expectation of 48.6%. It delivered a trailing four-quarter earnings surprise of 1.9%, on average. Broadcom currently sports a Zacks Rank #1.
Corning: New York-based Corning started out as a glass business that was reincorporated in 1936. The company has since developed its glass technologies to produce advanced glass substrates used in a wide range of applications across various markets. Corning’s competitive strength lies in its focus on innovation.
The company has a long-term earnings growth expectation of 20.5%. It delivered a trailing four-quarter earnings surprise of 4.4%, on average. Corning carries a Zacks Rank #2 at present.
Arista: Santa Clara, CA-based Arista is engaged in providing cloud networking solutions for data centers and cloud computing environments. The company holds a leadership position in 100-gigabit Ethernet switching for the high-speed datacenter segment. It is increasingly gaining market traction in 200- and 400-gig high-performance switching products and remains well-positioned for healthy growth in the data-driven cloud networking business with proactive platforms and predictive operations.
The company has a long-term earnings growth expectation of 17.9%. It delivered a trailing four-quarter earnings surprise of 9%, on average. Arista carries a Zacks Rank #2.
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Buy 5 Stocks With High ROE as Markets Hit Record High on Likely Truce
Key Takeaways
The broader equity markets witnessed one of the longest rallies since 2009 as the uptrend continued over the past few days, with benchmark indices hitting fresh all-time highs that wiped out the losses stemming from the Iran war. The uptrend was largely buoyed by optimism regarding a likely truce deal between the United States and Iran, despite no breakthrough in the initial discussions. With investors pinning hopes on a possible win-win deal between the two warring parties as negotiations continued amid a 10-day ceasefire between Israel and Lebanon, markets were further propelled by a relatively healthy start to the earnings season.
President Trump has also indicated that the Iran war is “very close to over,” with markets pricing in some volatility due to the impact of the war on the U.S. economy. 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. Ross Stores, Inc. (ROST - Free Report) , TE Connectivity plc (TEL - Free Report) , Broadcom Inc. (AVGO - Free Report) , Corning Incorporated (GLW - Free Report) and Arista Networks, Inc. (ANET - 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 less 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 assets, 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 screening:
Ross: Based in Dublin, CA, Ross is an off-price retailer of apparel and home accessories, offering in-season, branded and designer apparel, footwear, accessories and other home-related merchandise. Operating primarily in the United States, it targets middle-income households, keeping prices at generally 20% to 60% below the regular prices of most department and specialty stores.
The company has a long-term earnings growth expectation of 10% and delivered a trailing four-quarter earnings surprise of 6.2%, on average. It has a VGM Score of B. Ross carries a Zacks Rank #2 at present. 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.
The company has a long-term earnings growth expectation of 12.5%. It delivered a trailing four-quarter earnings surprise of 7.5%, on average. It has a VGM Score of A. TE Connectivity carries a Zacks Rank #2.
Broadcom: Headquartered in San Jose, CA, Broadcom develops a broad range of semiconductor solutions for enterprise and data center networking, home connectivity, set-top boxes, broadband access, telecommunication equipment, smartphones and base stations, data center servers and storage systems, factory automation, power generation and alternative energy systems, and electronic displays.
The company has a long-term earnings growth expectation of 48.6%. It delivered a trailing four-quarter earnings surprise of 1.9%, on average. Broadcom currently sports a Zacks Rank #1.
Corning: New York-based Corning started out as a glass business that was reincorporated in 1936. The company has since developed its glass technologies to produce advanced glass substrates used in a wide range of applications across various markets. Corning’s competitive strength lies in its focus on innovation.
The company has a long-term earnings growth expectation of 20.5%. It delivered a trailing four-quarter earnings surprise of 4.4%, on average. Corning carries a Zacks Rank #2 at present.
Arista: Santa Clara, CA-based Arista is engaged in providing cloud networking solutions for data centers and cloud computing environments. The company holds a leadership position in 100-gigabit Ethernet switching for the high-speed datacenter segment. It is increasingly gaining market traction in 200- and 400-gig high-performance switching products and remains well-positioned for healthy growth in the data-driven cloud networking business with proactive platforms and predictive operations.
The company has a long-term earnings growth expectation of 17.9%. It delivered a trailing four-quarter earnings surprise of 9%, on average. Arista carries a Zacks Rank #2.