5 ROE Picks as Markets Brace for Earnings Season Volatility
The U.S. equity markets witnessed intense volatility in the past week with falling oil prices and below par quarterly performance from leading blue-chip technology stocks weighing on the indices. To add to the woes, the death toll from the coronavirus outbreak continued to mount, forcing President Joe Biden to acknowledge that the country is facing an uphill task to economic recovery as fatalities are likely to increase further over the next few weeks. However, the slump was somewhat pared by solid U.S. manufacturing activity data, which surged to its highest level in more than 13.5 years in early January.
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 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 companies 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.
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 20 stocks that qualified the screen:
CDW Corporation CDW: Headquartered in Vernon Hills, IL, CDW Corporation 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 long-term earnings growth expectation of 13.1%. The company delivered a trailing four-quarter positive earnings surprise of 11.1%, on average.
Celanese Corporation CE: Texas-based Celanese Corporation is a global hybrid chemical company, manufacturing high-performance engineered polymers that are used in a range of high-value applications. The company delivered a trailing four-quarter positive earnings surprise of 8.6%, on average. The Zacks Rank #2 company has a long-term earnings growth expectation of 5.9%.
AGNC Investment Corp. AGNC: AGNC Investment Corp. is a real estate investment trust (REIT) that focuses on leveraged investments in Agency MBS, including residential mortgage pass-through securities and collateralized mortgage obligations. This Zacks #2 Ranked company pulled off a trailing four-quarter positive earnings surprise of 21.8%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
KLA Corporation KLAC: San Jose, CA-based KLA Corporation is an original equipment manufacturer of process diagnostics and control equipment and yield management solutions required for the fabrication of semiconductor integrated circuits or chips. The company delivered a trailing four-quarter positive earnings surprise of 8.9%, on average. This Zacks Rank #2 company has a long-term earnings growth expectation of 11.6%.
D.R. Horton, Inc. DHI: Based in Texas, D.R. Horton is one of the leading national homebuilders, primarily engaged in the construction and sale of single-family houses, both in the entry-level and move-up markets. The company delivered a trailing four-quarter positive earnings surprise of 21.6%, on average. This Zacks Rank #2 company has a long-term earnings growth expectation of 12.8%.
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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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KLA Corporation (KLAC) : Free Stock Analysis Report
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CDW Corporation (CDW) : Free Stock Analysis Report
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