Top 5 ROE Stocks To Buy On Renewed Fed Optimism
Zacks Investment Research | Nov 28, 2018 08:56PM ET
The U.S. equity markets gathered steam yesterday as the Federal Reserve chairman Jerome Powell indicated a slower approach to increasing interest rates. Despite the Federal Open Market Committee, the Fed’s policy-making body, raising the federal funds rate thrice this year, Powell indicated a dovish stance with reference to future rate hikes. He dropped hints that the Fed would apply a relatively slower-than-anticipated approach to increasing interest rates in the near future. On the cue, stocks witnessed a steep climb and allayed investor fears.
As investors employ a wait-and-see approach in a classic example of “backing and filling” in the market, they could benefit from ‘cash cow’ stocks that garner higher returns.
However, singling out cash-rich stocks alone does 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.
Get The News You Want
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 10 stocks that qualified the screen:
The Progressive Corporation (NYSE:PGR) : Based in Mayfield Village, OH, Progressive is one of the major auto insurers in the country. Founded in 1965, the company is a leading independent agency writer of private passenger auto coverage. It has a trailing four-quarter average positive earnings surprise of 13.5% and long-term earnings growth expectation of 7.3%. Progressive currently has a Zacks Rank #2.
Waste Management, Inc. (NYSE:WM) : Headquartered in Houston, TX, Waste Management is the largest provider of comprehensive waste-management services in North America. This Zacks #2 Ranked stock has a trailing four-quarter average positive earnings surprise of 4.5% and long-term earnings growth expectation of 12.3%.
Celanese Corporation (NYSE:CE) : Texas-based Celanese is a global hybrid chemical company with diverse products that rank either first or second in their respective markets, based on the market share. The company has a trailing four-quarter average positive earnings surprise of 13.3% and long-term earnings growth projection of 10%. Celanese has Zacks Rank of 2, at present. You can see Zacks Investment Research
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