Yahoo Finance 5 High ROE Stocks to Bet on as Markets Remain on Tenterhooks
After a torrid run this past week due to sticky inflation data, the broader U.S. equity market witnessed a recovery of sorts driven by solid quarterly earnings performance from hitherto reported companies. However, investors remained circumspect of key U.S. economic data, slated to be released later this week, which could give a precursor to the Federal Reserve’s stance regarding interest rate cuts this year. Investors were mostly on the tenterhooks with the odds of a rate cut in Fed’s next policy meeting in May declining significantly.
While the first-quarter GDP numbers are due for release today, the core personal consumption expenditures price index — the Fed’s preferred inflation gauge — is due tomorrow. Experts widely anticipate the economy to expand in excess of 2%, signifying the relative strength of the economy.
The solid economic metrics and high inflationary pressures cast doubts over the Fed’s proposed rate cuts this year. Despite the federal funds rate level (in the range between 5.25% and 5.50%) being the highest in more than 23 years, the Fed has kept the rates unchanged while pledging to cut the same thrice in 2024. However, the markets appear vulnerable to sudden downtrends owing to tempered expectations and eagerly await further clarity in Fed’s next policy meeting.
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, Suzano S.A. SUZ, PulteGroup, Inc. PHM, TE Connectivity Ltd. TEL and Valero Energy Corporation VLO are some of the stocks with high ROE to profit from.
Why ROE?
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.
Parameters Used for Screening
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 10 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 2.5%, 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 17.5% and delivered a trailing four-quarter earnings surprise of 12.5%, on average. This Zacks Rank #1 stock has a VGM Score of A.
TE Connectivity: Based in Schaffhausen, Switzerland, TE Connectivity manufactures and designs products that connect and protect the flow of power and data inside millions of products used by consumers and industries. The company serves customers in a broad array of industries ranging from consumer electronics, energy and healthcare to automotive, aerospace and communication networks.
The company has a long-term earnings growth expectation of 9.3% and delivered a trailing four-quarter earnings surprise of 5%, on average. It has a VGM Score of B. TE Connectivity carries a Zacks Rank #2.
Valero: San Antonio, TX-based Valero Energy is the largest independent refiner and marketer of petroleum products in the United States. The company was founded in 1980. It has a refining capacity of 3.1 million barrels per day across 15 refineries throughout the United States, Canada and the United Kingdom.
Valero carries a Zacks Rank #2. It has a long-term earnings growth expectation of 6% and delivered a trailing four-quarter earnings surprise of 10.7%, on average. It has a VGM Score of A.
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.
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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.
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Iron Mountain Incorporated (IRM) : Free Stock Analysis Report
Valero Energy Corporation (VLO) : Free Stock Analysis Report
PulteGroup, Inc. (PHM) : Free Stock Analysis Report
TE Connectivity Ltd. (TEL) : Free Stock Analysis Report
Suzano S.A. Sponsored ADR (SUZ) : Free Stock Analysis Report
