U.S. Markets closed
  • S&P Futures

    3,902.00
    +4.25 (+0.11%)
     
  • Dow Futures

    31,241.00
    +39.00 (+0.12%)
     
  • Nasdaq Futures

    11,838.00
    -40.25 (-0.34%)
     
  • Russell 2000 Futures

    1,771.50
    -3.40 (-0.19%)
     
  • Crude Oil

    110.35
    +0.46 (+0.42%)
     
  • Gold

    1,845.10
    +3.90 (+0.21%)
     
  • Silver

    21.87
    -0.03 (-0.13%)
     
  • EUR/USD

    1.0562
    -0.0026 (-0.2429%)
     
  • 10-Yr Bond

    2.7870
    -0.0680 (-2.38%)
     
  • Vix

    29.43
    +0.08 (+0.27%)
     
  • GBP/USD

    1.2495
    +0.0020 (+0.1587%)
     
  • USD/JPY

    127.8500
    +0.0560 (+0.0438%)
     
  • BTC-USD

    29,705.19
    +490.30 (+1.68%)
     
  • CMC Crypto 200

    650.34
    -23.03 (-3.42%)
     
  • FTSE 100

    7,389.98
    +87.24 (+1.19%)
     
  • Nikkei 225

    26,739.03
    +336.19 (+1.27%)
     

5 ROE Stocks to Profit as Inflationary Risks Rise

  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
·5 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

The U.S. equity markets has been trading in the vicinity of record high territories over the past few days with various positive economic metrics fueling the uptrend. While better-than-expected private payrolls data for May implied strengthening labor market conditions, surge in U.S. manufacturing activities and service sectors indicated a healthy post-pandemic economic revival despite short-term supply chain headwinds. As more workers return to the labor force with the mass rollout of vaccines and gradual reopening of facilities, pent-up demand is likely to propel steady economic recovery. However, the transitionary phase is widely expected to increase inflationary risk, fueling speculations that an overheating economy could prompt the Fed to rein in its monetary support.  

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 21 stocks that qualified the screen:

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 earnings surprise of 8.9%, on average. This Zacks Rank #2 company has a long-term earnings growth expectation of 14%.

CDW Corporation CDW: Headquartered in Vernon Hills, IL, 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 long-term earnings growth expectation of 13.1%. The company delivered a trailing four-quarter earnings surprise of 17.4%, on average.

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 30%, on average. Virtu Financial currently carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

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 53%, on average. This Zacks Rank #2 stock has a VGM Score of A.

Lam Research Corporation LRCX: Headquartered in Fremont, CA, Lam Research supplies wafer fabrication equipment and services to the semiconductor industry. This Zacks #1 Ranked company has a long-term earnings growth expectation of 32.8%. The company pulled off a trailing four-quarter earnings surprise of 11.1%, on average.

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.


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
KLA Corporation (KLAC) : Free Stock Analysis Report
 
Lam Research Corporation (LRCX) : Free Stock Analysis Report
 
Polaris Inc. (PII) : Free Stock Analysis Report
 
Virtu Financial, Inc. (VIRT) : Free Stock Analysis Report
 
CDW Corporation (CDW) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research