5 Best ROE Stocks To Buy As Trump Faces Healthcare Bill Test

The equity market performance was mixed this week with continued volatility in oil prices and uncertainty shrouding the passage of the new Republican healthcare bill to repeal and replace Obamacare. Although President Trump expects the final draft of the bill to be relatively better, some conservative and centrist Republican senators as well as Democrats are likely to vehemently oppose the bill. As sublime tensions continue to raise an element of caution, investors are on the lookout for ‘cash cow’ stocks that will offer high returns.

However, singling out cash-rich stocks alone does not make for a solid investment proposition unless they are backed by attractive efficiency ratios like return on equity (ROE). A high ROE ensures that the company is reinvesting its cash at a high rate of return.

ROE: A Key Metric

ROE = Net Income/Shareholders’ Equity

ROE helps investors distinguish between profit-generating companies from profit burners and is useful for determining the financial health of a company. In other words, this financial metric enables investors to identify stocks 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 increasing its profits without investing new equity capital in the business and portrays management 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 one dollar 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 12 stocks that qualified the screen:

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Broadcom Limited (NASDAQ:AVGO) : Broadcom is a premier designer, developer and global supplier of a broad range of semiconductor devices with a focus on complex digital and mixed signal complementary metal oxide semiconductor based devices and analog III-V based products. The company has a trailing four-quarter average earnings surprise of 6.7% and long-term earnings growth expectation of 13.6%. Broadcom carries a Zacks Rank #1.

International Consolidated Airlines Group (LON:ICAG), S.A. (OTC:ICAGY) : Based in Madrid, Spain, International Consolidated Airlines Group is one of the world's largest airline groups with 547 aircraft flying to 268 destinations and carrying more than 100 million passengers each year. It is the third largest group in Europe and the sixth largest in the world, based on revenues. This Zacks Rank #1 stock has a long-term earnings growth projection of 6.4%. You can see Zacks Investment Research