5 Top ROE Picks As Markets Turn Trump-Friendly

The U.S. equity market recently saw key indices scale a record high, driven by expectations of radical policy changes by the President-designate Donald Trump. Investors expect economic stimulus and infrastructure investments to boost hiring and corporate earnings while cutting taxes. However, in the same breath, investors anticipate higher inflation as the markets brace for a probable interest rate hike by the Fed.

Amid such an equivocal scenario, investors are often on the lookout for ‘cash cow’ stocks that would enable them to rake in more profits.

However, singling out cash-rich stocks alone does not make them 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.

Significance of ROE

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 growing its profits without investing any 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 added Cash Flow greater than $1 billion and ROE greater than X-Industry as our primary screening parameters. In addition, we take 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. Of course, the higher the ROA, the better it is.

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 13 stocks that qualified the screening:

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General Mills, Inc. (NYSE:GIS) : Based in Minneapolis, MN, General Mills is a global manufacturer and marketer of branded consumer foods sold through retail stores. The company also serves the foodservice and baking industries. This Zacks Rank #2 stock has a decent long-term earnings growth expectation of 8.2% and a modest trailing four-quarter average earnings surprise of 4.4%.

Texas Instruments Incorporated (NASDAQ:TXN) : Headquartered in Dallas, TX, Texas Instruments is an original equipment manufacturer of analog, mixed signal and digital signal processing integrated circuits. This Zacks Rank #2 stock has a decent trailing four-quarter average earnings surprise of 5.7% and long-term earnings growth projection of 9.6%.

Braskem S.A. (NYSE:BAK) : Braskem is the leading thermoplastic resins (polyethylene, polypropylene and PVC) producer in the Americas and the largest producer of polypropylene in the U.S. This Zacks Rank #1 stock has a trailing four-quarter average earnings surprise of 107.8%. You can see Zacks Investment Research