Yahoo Finance Buy 5 High ROE Stocks as Earnings Season Kicks Off
The U.S. equity markets witnessed intense volatility over the past couple of days as corporate earnings season kicked off. With a relatively modest earnings performance from hitherto reported companies, investors are searching for definite cues to the economic growth trajectory as market signals remain mixed. On the one hand, recession fears are spooking the market, while on the other, the easing inflation trend is buoying it. To elucidate, the markets remained on tenterhooks as Fed officials observed in its March policy meeting that the banking crisis could drag the economy into a mild recession later this year.
However, data from the March producer price index, a leading indicator of consumer inflation, revealed a 0.5% decline month over month compared with broad-based expectations of a relatively flat curve. The core wholesale prices reading (which excludes food and energy) fell 0.1% sequentially against wide expectations of a 0.2% increase. With softening inflationary pressures, investors largely expect the Fed to hold the interest rates in the near term. Moreover, the Fed indicated earlier that there might be just another hike in the current year depending on the macroeconomic factors, as tightening credit conditions could put pressure on the 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 like return on equity (ROE). A high ROE ensures that the company is reinvesting cash at a high rate of return. AutoNation, Inc. AN, Suzano S.A. SUZ, Valero Energy Corporation VLO, Delta Air Lines, Inc. DAL and Ryder System, Inc. R 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.
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 24 stocks that qualified the screen:
AutoNation: Incorporated in Delaware in 1991, AutoNation is the largest automotive retailer in the United States. Apart from retailing new and used vehicles, the company offers vehicle maintenance and repair services, vehicle parts, extended service contracts, vehicle protection products and other aftermarket products. In addition, it arranges financing for vehicle purchases through third-party sources.
It has a long-term earnings growth expectation of 3.5% and delivered a trailing four-quarter earnings surprise of 5%, on average. It has a VGM Score of A. Currently, AutoNation 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.
Suzano has a long-term earnings growth expectation of 6.9% and delivered a trailing four-quarter earnings surprise of 53.8%, on average. It has a VGM Score of B. It sports a Zacks Rank #1.
Valero Energy: 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. Valero Energy has a refining capacity of 3.1 million barrels per day across 15 refineries throughout the United States, Canada and the United Kingdom.
The company has a long-term earnings growth expectation of 6% and delivered a trailing four-quarter earnings surprise of 19%, on average. It has a VGM Score of A. Valero Energy carries a Zacks Rank #2.
Delta Air Lines: Based in Atlanta, GA, Delta Air Lines is one of the four carriers that control majority of the U.S. aviation market. It commands more than 17% share of the domestic market, while the bulk of its revenues are recognized from its airline segment. Geographically, passenger revenues are generated by domestic operations apart from international operations in the Atlantic, Latin America and the Pacific region.
Delta Air Lines has a long-term earnings growth expectation of 34.6% and has a VGM Score of A. Delta Air Lines carries a Zacks Rank #2.
Ryder: Florida-based Ryder is recognized as one of the world's largest providers of integrated logistics and transportation solutions. Its customers range from small businesses to large international enterprises. They are from a wide variety of industries, the most significant of which are automotive, electronics, transportation, grocery, lumber and wood products, food service and home furnishing.
Ryder delivered a trailing four-quarter earnings surprise of 21.8%, on average. It has a VGM Score of A. It carries a Zacks Rank #2.
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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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Delta Air Lines, Inc. (DAL) : Free Stock Analysis Report
Ryder System, Inc. (R) : Free Stock Analysis Report
Valero Energy Corporation (VLO) : Free Stock Analysis Report
AutoNation, Inc. (AN) : Free Stock Analysis Report
Suzano S.A. Sponsored ADR (SUZ) : Free Stock Analysis Report
