5 Stocks With High ROE to Buy as Market Rally Subsides
After a string of solid performances over the past week, the U.S. equity market seemed to run out of steam, declining at the beginning of a holiday-shortened week. Although there appeared to be no definite trigger for the sudden slide, the strong undercurrent of uncertain market conditions likely played the lead role behind the descent. The focus has now shifted to the Federal Reserve’s Jul 25-26 policy meeting, which is likely to be another potential market catalyst.
The equity market rally was primarily triggered by the Fed’s decision to hit a pause button for its aggressive rate hike regime and maintain its benchmark interest rate in the range of 5-5.25%. The pause was largely driven by a slowdown in inflation, which recorded 4.1% annual growth in May, significantly down from its peak value of 9.1% in June 2022. Retail sales, which are not adjusted for inflation, improved 0.3% month over month against broad-based expectations of a 0.2% decline. On a year-over-year basis, it jumped 1.6% as consumers continued to spend.
The latest New York state factory activity data further showed a surprise rebound in orders and shipments in June, portraying economic strength. The markets were also propelled by a better-than-expected May jobs report that allayed the fears of recession from the near-term horizon to at least until 2024. The jobs report revealed that payrolls in the public and private sectors increased by 339,000 in May, significantly higher than broad-based expectations of a 190,000 rise. However, markets continued to be under stress as Fed indicated that two more rate hikes are likely to take place later this year.
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. Marriott International, Inc. MAR, Suzano S.A. SUZ, Atkore Inc. ATKR, Nexstar Media Group, Inc. NXST and Triton International Limited TRTN are some of the stocks with high ROE to profit from.
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.
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 seven stocks that qualified the screen:
Marriott: Headquartered in Bethesda, MD, Marriott is a leading worldwide hospitality company focused on lodging management and franchising. As of year-end 2022, the company's portfolio encompassed nearly 8,300 properties under 30 leading brands spanning 138 countries and territories.
It has a long-term earnings growth expectation of 15.5% and delivered a trailing four-quarter earnings surprise of 8%, on average. Currently, Marriott carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Suzano: Headquartered in Salvador, Brazil, Suzano produces and sells eucalyptus pulp and paper products. With more than 90 years of experience, this vertically integrated firm is one of the largest producers of paper and graphic products in South America.
Suzano has a long-term earnings growth expectation of 6.9% and delivered a trailing four-quarter earnings surprise of 54.8%, on average. It has a VGM Score of B. It 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 16.3%, on average. It has a VGM Score of A.
Nexstar Media: Headquartered in Irving, TX, Nexstar Media is a leading diversified media firm that produces and distributes engaging local and national news, sports and entertainment content across television, streaming and digital platforms. It also offers premium multiplatform and video-on-demand advertising opportunities at scale for businesses and brands seeking to leverage its strong client base.
The company has a long-term earnings growth expectation of 10% and delivered a trailing four-quarter earnings surprise of 21.4%, on average. It has a VGM Score of B. Nexstar Media sports a Zacks Rank #1.
Triton: Based in Hamilton, Bermuda, Triton is the largest lessor of intermodal containers (large steel boxes used for transporting freight by ship/rail/truck). The company also focuses on leasing chassis, which are used for transporting containers. It offers leasing services through 19 offices and three independent offices in 16 countries.
The company delivered a trailing four-quarter earnings surprise of 6.3%, on average. Triton carries a Zacks Rank #2. 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.
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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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Marriott International, Inc. (MAR) : Free Stock Analysis Report
Nexstar Media Group, Inc (NXST) : Free Stock Analysis Report
Triton International Limited (TRTN) : Free Stock Analysis Report
Atkore Inc. (ATKR) : Free Stock Analysis Report
Suzano S.A. Sponsored ADR (SUZ) : Free Stock Analysis Report
