Top 4 ROE Stocks To Profit In A Highly Unsettled Market

The U.S. equity markets remained highly volatile in the past week as chances of an impeachment probe of the serving President picked up pace, while geopolitical tensions posed a latent threat. Although both the United States and China appeared intent to strike a trade deal, Trump’s pressure tactics to reduce the trade barriers threatened to derail the talks yet again. Despite the authorities clearing the air on reported plans to delist China stocks from the U.S. markets, dark clouds still hover over the scheduled bilateral meeting in October to reconcile their differences through negotiations.

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, singling out cash-rich stocks alone do not make for a solid investment proposition unless these 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 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 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 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.

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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 four of the seven stocks that qualified the screen:

The Progressive Corporation (NYSE:PGR) : Headquartered in Mayfield, OH, Progressive Corporation offers personal and commercial auto insurance, residential property insurance and other specialty property-casualty insurance and related services, primarily in the United States. This Zacks #2 Ranked company delivered a trailing four-quarter average positive earnings surprise of 7.5%. It has a long-term earnings growth projection of 7.3%.

International Consolidated Airlines Group (LON:ICAG), S.A. (OTC:ICAGY) : Based in Madrid, Spain, International Consolidated Airlines Group operates passenger and cargo transportation services in the United Kingdom, Spain, Ireland, the United States and rest of the world. The company operates under the British Airways, Iberia, Vueling, LEVEL and Aer Lingus brands. This Zacks #1 Ranked firm delivered a trailing four-quarter average positive earnings surprise of 92.9%. You can see Zacks Investment Research