Top 5 ROE Picks as Markets Brace for Mega Infrastructure Plan

After trading near all-time highs for the bulk of the past few days, the U.S. equity markets appeared to hit the brakes with surging bond yields touching 14-month high. Notably, the 10-year Treasury yield briefly hit 1.77% for the first time since January 2020, before ending at 1.72% yesterday. The rising bond yields seem to be the fallout of the impending speech of President Biden, whereby a mega infrastructure plan (likely involving trillions of dollars) is expected to be unveiled. With the investment spree possibly pushing up the inflation, bond yields have risen sharply. This, in turn, made stock market valuations appear less attractive, leading to broader equity market decline.

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.

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:

CDW Corporation CDW: Headquartered in Vernon Hills, IL, CDW Corporation is a leading provider of integrated information technology solutions to small, medium and large business, government, education and healthcare customers in the United States, United Kingdom and Canada. This Zacks #2 Ranked company has a long-term earnings growth expectation of 13.1%. The company delivered a trailing four-quarter earnings surprise of 14.1%, on average.

Rockwell Automation, Inc. ROK: Based in Milwaukee, WI, Rockwell Automation provides industrial automation and information solutions worldwide. The company delivered a trailing four-quarter positive earnings surprise of 18.7%, on average. The Zacks Rank #2 company has a long-term earnings growth expectation of 9.3%.

Virtu Financial, Inc. VIRT: Headquartered in New York, NY, Virtu Financial is a market-leading financial services firm that leverages cutting-edge technology to provide execution services and data, analytics and connectivity products to its clients and deliver liquidity to the global markets. The company pulled off a trailing four-quarter earnings surprise of 24.8%, on average. Virtu Financial currently sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Polaris Inc. PII: Headquartered in Medina, MN, Polaris designs, manufactures and markets power sports vehicles worldwide. It also produces replacement parts and accessories of such vehicles. The company delivered a trailing four-quarter earnings surprise of 25.6%, on average. This Zacks Rank #2 stock has a VGM Score of A.

D.R. Horton, Inc. DHI: Based in Texas, D.R. Horton is one of the leading national homebuilders, primarily engaged in the construction and sale of single-family houses, both in the entry-level and move-up markets. The company delivered a trailing four-quarter earnings surprise of 25.8%, on average. This Zacks Rank #2 company has a long-term earnings growth expectation of 13.4%.

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.  

The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.

Click here to sign up for a free trial to the Research Wizard today.

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.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Rockwell Automation, Inc. (ROK) : Free Stock Analysis Report
 
Polaris Inc. (PII) : Free Stock Analysis Report
 
D.R. Horton, Inc. (DHI) : Free Stock Analysis Report
 
Virtu Financial, Inc. (VIRT) : Free Stock Analysis Report
 
CDW Corporation (CDW) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.