5 Top ROE Stocks For Improving Your Portfolio Returns

Yet again, Fed Chair Janet Yellen hit the pause button on an interest rate hike citing mixed domestic economic reports. In a knee-jerk reaction, the U.S. equity market continued to fall as investors became wary of other factors like ensuing central-bank decisions, volatile global economy and next week’s U.K. vote on European Union membership.

In such a topsy-turvy market, where money can play a key role in surviving carnage, investors look for ‘cash cow’ stocks to milk more cash or 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.

ROE: A Key Financial Metric

ROE = Net Income/Shareholders’ Equity

ROE helps investors distinguish between profit-generating companies from profit burners and is a useful tool for determining the financial health of a company. In other words, this financial metric enables investors to identify those stocks that diligently deploy cash for higher investor returns instead of piling up the dry powder.

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.

Parameters Used to Screen Solid ROE Stocks

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. However, these are not the ultimate criteria for short listing stocks in a turbulent market. As such, we have added a few additional criteria to arrive at a winning strategy to mint money.

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 its assets, which include 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 to 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 5 of the 12 stocks that qualified the screening:

Altria Group, Inc. (NYSE:MO) : Headquartered in Richmond, VA, Altria manufactures and sells cigarettes, smokeless products, and wine through its subsidiaries. This Zacks Rank #2 (Buy) stock has a healthy long-term earnings growth expectation of 7.5%.

Braskem S.A. (NYSE:BAK) : Headquartered in São Paulo, Brazil, Braskem has the largest petrochemical operation in Latin America. This Zacks Rank #2 stock is the leading thermoplastic resins (polyethylene, polypropylene and PVC) producer in the Americas and the largest producer of polypropylene in the U.S.

Zoetis Inc. (NYSE:ZTS) : Founded in 1952 and headquartered in Florham Park, NJ, Zoetis manufactures and markets veterinary vaccines, medicines, diagnostic products and related services for livestock and companion animals across the globe. This Zacks Rank #2 stock has a solid long-term earnings growth expectation of 12.6% and a trailing four-quarter average earnings surprise of 16.4%.

International Consolidated Airlines Group (LON:ICAG), S.A. (OTC:ICAGY) : This Zacks Rank #2 stock operates passenger and cargo transportation services in the U.K., Spain, the U.S., and the rest of the world by acting as the holding company for British Airways. The company has a long-term earnings growth expectation of 16.9%, compared with the industry expectation of 11.1%.

Lear Corp. (NYSE:LEA) : Headquartered in Southfield, MI, Lear operates as one of the leading suppliers of automotive seating and electrical distribution systems across the globe. This Zacks Rank #1 (Strong Buy) stock has a solid long-term earnings growth expectation of 15.7% and a trailing four-quarter average earnings surprise of 13.1%.

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.

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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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