Yahoo Finance 5 Stocks With High ROE to Profit as Markets Sway Whimsically
Over the past couple of trading days, the broader U.S. equity markets swayed wildly, registering the worst day of 2024 to recovering sharply to record-high tallies on the following day.
The markets seemed to backtrack as the minutes of the Federal Reserve’s May policy meeting reignited fears that the central bank might not cut interest rates in the near future. The minutes revealed that several Fed officials are of the view that although inflation has eased over the past year, it is yet to achieve the benchmark 2% level. Consequently, there is an increasing willingness to resort to stricter policy measures if inflation fails to move toward the coveted goal.
However, solid quarterly earnings by chipmaker Nvidia and the consequent bullish sentiment on the AI behemoth that boasts a market cap of more than $2.5 trillion led to a spirited turnaround by the markets. With investors betting big on the AI boom on solid demand trends, the markets scripted a remarkable uptrend to wipe off the loss and move into record-high territories.
The upward trajectory was also buoyed by the optimism regarding a probable interest rate cut by the Federal Reserve in the near future. With weaker-than-expected job growth per the April nonfarm payrolls report and moderating wage gains, investors are pricing in a second rate cut by the end of the year with a nearly 50% likelihood of a 25-basis point rate cut in September.
Recent data from S&P Global further revealed that U.S. Manufacturing PMI rose from 50.0 in April to 50.9 in May, portraying modest improvement in overall business conditions within the goods-producing sector. The headline S&P Global Flash U.S. PMI Composite Output Index rose sharply from 51.3 in April to 54.4 in May, implying healthy growth midway through the second quarter after a slowdown in March and April.
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. Reliance, Inc. RS, Suzano S.A. SUZ, PulteGroup, Inc. PHM, Alphabet Inc. GOOGL and Banco de Chile BCH 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 11 stocks that qualified the screening:
Reliance: Los Angeles, CA-based Reliance is a leading metals service center firm engaged in value-added materials management and metals processing services. It also distributes over 100,000 metal products to more than 125,000 customers across a vast spectrum of industries. Reliance is the biggest North American metals service center company based on revenues with more than 300 locations.
It has a long-term earnings growth expectation of 2.3% and delivered a trailing four-quarter earnings surprise of 4.5%, on average. It has a VGM Score of B. Reliance 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 17.6% and delivered a trailing four-quarter earnings surprise of 12.5%, on average. It sports a Zacks Rank #1.
Alphabet: Headquartered in Mountain View, CA, Alphabet is one of the most innovative companies in the modern technological age. Over the last few years, the company has evolved from primarily being a search engine provider to cloud computing, ad-based video and music streaming, autonomous vehicles, healthcare providers and others. In the online search arena, Google has a monopoly with more than 94% of the online search volume and market. Alphabet has witnessed an increase in search queries, resulting from ongoing growth in user adoption and usage, primarily on mobile devices, continued growth in advertiser activity and improvements in ad formats.
The company has a long-term earnings growth expectation of 17.5% and delivered a trailing four-quarter earnings surprise of 11.3%, on average. Alphabet sports a Zacks Rank #1.
Banco de Chile: Headquartered in Santiago, Chile, Banco de Chile provides various banking services to customers in the Latin American country. These include deposit accounts, loans, payment-related cards and insurance solutions. The company also offers services such as cash management, treasury, financial advisory, trade finance, leasing, factoring, payment, payroll, collection, mutual fund management, securities brokerage, currency trading, investment management, collection, securitization and capital markets services.
It delivered a trailing four-quarter earnings surprise of 7.1%, on average. Banco de Chile 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.
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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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Reliance, Inc. (RS) : Free Stock Analysis Report
PulteGroup, Inc. (PHM) : Free Stock Analysis Report
Banco De Chile (BCH) : Free Stock Analysis Report
Alphabet Inc. (GOOGL) : Free Stock Analysis Report
Suzano S.A. Sponsored ADR (SUZ) : Free Stock Analysis Report
