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5 ROE Picks as Markets Hit Top Gear With Solid Earnings Start

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Supriyo Bose
·5 min read
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The U.S. equity markets are currently trading in the vicinity of record highs buoyed by solid earnings performance of hitherto reported companies and falling bond yields. Notably, the benchmark 10-year Treasury yield fell below 1.6% as investors appeared to factor in the Fed’s assurances of maintaining an accommodative monetary policy and reposed faith in the stock market. A strong rebound in March U.S. retail sales further acted as a catalyst to the uptrend, with additional stimulus checks helping Americans to open up their purse strings for higher purchases. An improved job market scenario with jobless claims falling to a one-year low of 576,000 also contributed to the equity market upswing.

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.

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 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.

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.

Here are five of the 17 stocks that qualified the screen:

Lockheed Martin Corporation LMT: Headquartered in Bethesda, MD, Lockheed Martin is reportedly the largest defense contractor in the world. Its main areas of focus are defense, space, intelligence, homeland security and information technology including cyber security. This Zacks #2 Ranked company has a long-term earnings growth expectation of 6%. The company delivered a trailing four-quarter earnings surprise of 4%, on average.

Celanese Corporation CE: Texas-based Celanese is a global hybrid chemical firm that produces chemical substances and materials. The company manufactures high performance engineered polymers that are used in a range of high-value applications. It also produces acetyl products for most major industries. The company delivered a trailing four-quarter positive earnings surprise of 15.2%, on average. The Zacks Rank #1 company has a long-term earnings growth expectation of 19%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Virtu Financial, Inc. VIRT: Headquartered in New York, NY, Virtu Financial is a market-leading financial services firm that leverages cutting-edge technology to provide execution services and data, analytics and connectivity products to its clients and deliver liquidity to the global markets. The company pulled off a trailing four-quarter earnings surprise of 24.8%, on average. Virtu Financial currently carries a Zacks Rank #2.

Polaris Inc. PII: Headquartered in Medina, MN, Polaris designs, manufactures and markets power sports vehicles worldwide. It also produces replacement parts and accessories of such vehicles. The company delivered a trailing four-quarter earnings surprise of 25.6%, on average. This Zacks Rank #2 stock has a VGM Score of A.

T. Rowe Price Group, Inc. TROW: Founded in 1937 and headquartered in Baltimore, T. Rowe is a global investment management firm that provides a broad array of mutual funds, sub-advisory services and separate account management for individual and institutional investors, retirement plans and financial intermediaries. The company delivered a trailing four-quarter earnings surprise of 5.5%, on average. This Zacks Rank #2 company has a long-term earnings growth expectation of 12.3%.

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.

Click here to sign up for a free trial to the Research Wizard today.

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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