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5 Stocks With High ROE to Consider Amid Market Volatility
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Key Takeaways
TE Connectivity, Arista, Ross Stores, Gartner and PACCAR qualified a cash-rich, high-ROE stock screen.
The screen requires cash flow above $1 billion, with ROE and ROA above each stock's industry.
Arista has 22.7% long-term earnings growth expected and an 8.9% average four-quarter surprise.
The broader equity markets witnessed an erratic pattern over the past few trading days, rising sharply with plummeting oil prices early this week and declining the following day on surging Treasury yields. With Iran offering to open the Strait of Hormuz in about a week amid political dialogues with the U.S. delegation, crude oil prices went downhill, driving stocks higher. However, the uptrend was punctured by soaring bond yields as investors feared that more interest rate hikes from the Federal Reserve were just around the corner.
Stable economic growth and solid labor market conditions have led to broad-based concerns that the Fed might resort to further rate hikes to tame inflationary pressures. Consequently, market uncertainty remained elevated and volatility became the order of the day. 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. TE Connectivity plc (TEL - Free Report) , Arista Networks, Inc. (ANET - Free Report) , Ross Stores, Inc. (ROST - Free Report) , Gartner, Inc. (IT - Free Report) and PACCAR Inc. (PCAR - 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 13 stocks that qualified the screening:
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 13%. It delivered a trailing four-quarter earnings surprise of 4.5%, on average. TE Connectivity carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
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 22.7%. It delivered a trailing four-quarter earnings surprise of 8.9%, on average. Arista sports a Zacks Rank #1.
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 generally 20% to 60% below the regular prices of most department and specialty stores.
The company has a long-term earnings growth expectation of 14.6% and delivered a trailing four-quarter earnings surprise of 11.2%, on average. Ross carries a Zacks Rank #2 at present.
Gartner: Headquartered in Stamford, CT, Gartner is reportedly the world's leading information technology research and advisory firm. The company offers rich domain expertise and technology-related insight necessary for an informed decision-making process.
Gartner has a long-term earnings growth expectation of 18.5% and delivered a trailing four-quarter earnings surprise of 13.5%, on average. Gartner sports a Zacks Rank #1. It has a VGM Score of B.
PACCAR: Headquartered in Bellevue, WA, PACCAR is a leading manufacturer of heavy-duty trucks in the world and has substantial manufacturing exposure to light/medium trucks. It also designs and manufactures diesel engines and other powertrain components for use in its products and sale to third-party manufacturers of trucks and buses. In addition to supplying aftermarket parts, PACCAR offers finance and leasing services.
The company has a long-term earnings growth expectation of 14.8% and delivered a trailing four-quarter earnings surprise of 2.3%, on average. PACCAR carries a Zacks Rank #2 at present. It has a VGM Score of B.
View the Zacks #1 Rank List
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5 Stocks With High ROE to Consider Amid Market Volatility
Key Takeaways
The broader equity markets witnessed an erratic pattern over the past few trading days, rising sharply with plummeting oil prices early this week and declining the following day on surging Treasury yields. With Iran offering to open the Strait of Hormuz in about a week amid political dialogues with the U.S. delegation, crude oil prices went downhill, driving stocks higher. However, the uptrend was punctured by soaring bond yields as investors feared that more interest rate hikes from the Federal Reserve were just around the corner.
Stable economic growth and solid labor market conditions have led to broad-based concerns that the Fed might resort to further rate hikes to tame inflationary pressures. Consequently, market uncertainty remained elevated and volatility became the order of the day. 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. TE Connectivity plc (TEL - Free Report) , Arista Networks, Inc. (ANET - Free Report) , Ross Stores, Inc. (ROST - Free Report) , Gartner, Inc. (IT - Free Report) and PACCAR Inc. (PCAR - 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 13 stocks that qualified the screening:
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 13%. It delivered a trailing four-quarter earnings surprise of 4.5%, on average. TE Connectivity carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
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 22.7%. It delivered a trailing four-quarter earnings surprise of 8.9%, on average. Arista sports a Zacks Rank #1.
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 generally 20% to 60% below the regular prices of most department and specialty stores.
The company has a long-term earnings growth expectation of 14.6% and delivered a trailing four-quarter earnings surprise of 11.2%, on average. Ross carries a Zacks Rank #2 at present.
Gartner: Headquartered in Stamford, CT, Gartner is reportedly the world's leading information technology research and advisory firm. The company offers rich domain expertise and technology-related insight necessary for an informed decision-making process.
Gartner has a long-term earnings growth expectation of 18.5% and delivered a trailing four-quarter earnings surprise of 13.5%, on average. Gartner sports a Zacks Rank #1. It has a VGM Score of B.
PACCAR: Headquartered in Bellevue, WA, PACCAR is a leading manufacturer of heavy-duty trucks in the world and has substantial manufacturing exposure to light/medium trucks. It also designs and manufactures diesel engines and other powertrain components for use in its products and sale to third-party manufacturers of trucks and buses. In addition to supplying aftermarket parts, PACCAR offers finance and leasing services.
The company has a long-term earnings growth expectation of 14.8% and delivered a trailing four-quarter earnings surprise of 2.3%, on average. PACCAR carries a Zacks Rank #2 at present. It has a VGM Score of B.