5 Stocks With High ROE to Buy as Rate Hike Probability Rises
The U.S. equity markets have witnessed a steady downtrend over the past few trading days due to increasing concerns that more interest rate hikes are around the corner. The downtrend was further accentuated by the rising 10-year Treasury yield, as oil prices increased after Saudi Arabia and Russia extended voluntary supply cuts. This weighed on the stock market as investors began to worry about the broader outlook of the economy.
Stronger-than-expected data, as revealed by recent readings on both the services and manufacturing sectors, raised questions about the U.S. economy. The ISM services index rose 2.1 percentage points to 58.9% in August – a four-month high, while the prices component of the ISM manufacturing index was up 5.8 points to 48.4% – a reversal from the recent trend. These have increased the probability that the Federal Reserve will hike interest rates in November while holding the same steady this month.
The focus has now shifted to the Fed’s Sep 19-20 policy meeting. This will likely be another market catalyst, with investors looking for cues about the broader economy and the trajectory of future interest rate hikes.
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. ON Semiconductor Corporation ON, Dillard's, Inc. DDS, Ryder System, Inc. R, Upbound Group, Inc. UPBD and Atkore Inc. ATKR are some of the stocks with high ROE to profit from.
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.
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 14 stocks that qualified the screening:
ON Semiconductor: Phoenix, AZ-based onsemi is an original equipment manufacturer of a broad range of discrete and embedded semiconductor components. The company has a very well-diversified business. onsemi generates a significant percentage of revenues from the computing, consumer, industrial, communications and automotive markets.
The stock has a long-term earnings growth expectation of 7.5% and delivered a trailing four-quarter earnings surprise of 8.7%, on average. onsemi carries a Zacks Rank #2.
Dillard's: Founded in 1938, Dillard's is a large departmental store chain featuring fashion apparel and home furnishings. Its merchandise mix consists of both branded and private-label items. The company’s strategy is to offer more fashion-forward and trendy products to attract customers.
Dillard’s is benefiting from continued momentum in consumer demand and better inventory management. The company delivered a trailing four-quarter earnings surprise of 77.1%, on average. DDS sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Ryder: Florida-based Ryder is recognized as one of the world's largest providers of integrated logistics and transportation solutions. Ryder’s customers range from small businesses to large international enterprises. They are drawn from a wide variety of industries, the most significant of which are automotive, electronics, transportation, grocery, lumber and wood products, food service and home furnishing.
Ryder sports a Zacks Rank #1. It delivered a trailing four-quarter earnings surprise of 11.2%, on average. It has a VGM Score of B.
Upbound Group: Headquartered in Plano, TX, Upbound Group (formerly Rent-A-Center, Inc.) is a leading lease-to-own provider with operations in the United States, Puerto Rico and Mexico. The company provides services to a large portion of consumers by providing them access and the opportunity to obtain ownership of high-quality, durable products under a flexible lease purchase agreement with no long-term debt obligation.
The company delivered a trailing four-quarter earnings surprise of 25.8%, on average. It has a VGM Score of B. Upbound Group sports a Zacks Rank #1.
Atkore: Headquartered in Harvey, IL, Atkore offers conduits, cables and installation accessories in the United States and internationally. With a network of manufacturing and distribution facilities worldwide, Atkore is a leading provider of electrical, safety and infrastructure solutions.
Atkore carries a Zacks Rank #2. It delivered a trailing four-quarter earnings surprise of 22.3%, on average. It has a VGM Score of B.
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
Dillard's, Inc. (DDS) : Free Stock Analysis Report
Ryder System, Inc. (R) : Free Stock Analysis Report
ON Semiconductor Corporation (ON) : Free Stock Analysis Report
Atkore Inc. (ATKR) : Free Stock Analysis Report
Upbound Group, Inc. (UPBD) : Free Stock Analysis Report
