Top 5 ROE Stocks To Buy As Markets Await Stimulus Package

With the coronavirus pandemic spooking financial markets in one of the worst declines in the recent past, evoking bitter memories of the 2008 market crash, U.S. lawmakers have decided to rise above their political differences to seek an economic stimulus package. The Senate is reportedly inching toward a $2 trillion rescue package deal to revive the economy. The market sprang to its feet on the news with the Dow soaring 2,111 points or 11.4% for its biggest one-day percentage gain since 1933.

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 its cash at a high rate of return.

Why ROE?

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.

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 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.

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Here are five of the 13 stocks that qualified the screen:

CDW Corporation (NASDAQ:CDW) : Headquartered in Vernon Hills, IL, and founded in 1984, CDW 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 trailing four-quarter positive earnings surprise of 8.3% on average. It has a long-term earnings growth projection of 13.1%.

Seagate Technology PLC (NASDAQ:STX) : Headquartered at Dublin, Ireland, Seagate is the second-largest manufacturer of hard disk drives in the United States. The company also develops other electronic data storage products such as solid-state drive and solid-state hybrid drives. The company has a trailing four-quarter positive earnings surprise of 6.2%, on average. Currently, it carries a Zacks Rank #2. You can see Original post