Investors can pick from a seemingly endless array of metrics to help find the best stocks. And there are no right or wrong investment strategies. Today, however, we are going to focus on one of the quickest and best gauges of how effectively management is running a company: Return on Equity.
Return on Equity or ROE helps investors understand if a firm’s executives are creating assets with investors’ cash or burning it. ROE shows a company’s ability to turn assets into profits. Put another way, this vital metric measures the profits made for each dollar of shareholder equity.
ROE is calculated as net income / shareholder's equity. For example: if $0.10 of assets are created for each $1 of shareholder equity that would equal an ROE of 10%.
Overall, Return on Equity is a great item to use regardless of what type of investor you are since it provides insight into management’s ability to create value and keep costs under control. Plus, if ROE slips, it can alert us to potential problems.
With all that said, let’s take a look at this screen’s parameters and see the companies that are proving they can return value to shareholders instead of churning through their cash.
• Zacks Rank equal to 1
The Zacks Rank looks at upward earnings estimate revisions, among other metrics, in order to find companies that are projected to see their earnings get stronger. In fact, beginning with a Zacks Rank #1 can be a great starting point because it boasts an average annual return of over 25% per year during the last 30 years.
• Price greater than or equal to 5
Today we ruled out any stocks that are trading for less than $5 a share because they can be more volatile and speculative.
• Price/Sales Ratio less than or equal to 1
On top of that, we are looking for a low price to sales ratio. Today we went with 1 or below as this range is usually thought to provide better value since investors pay less for each unit of sales.
• % (Broker) Rating Strong Buy equal to 100 (%)
In this screen, we decided to go with companies that brokers are fully on board with since ratings are typically skewed strongly toward ‘buy’ and ‘strong buy.’
• ROE greater than or equal to 10
Lastly, but most importantly for today’s screen, we got rid of any companies with Return on Equity of less than 10 because the median ROE value for all of the stocks in the Zacks Universe is under 10.
This strategy comes loaded with the Research Wizard and is called bt_sow_roe.und. It can be found in the SoW (Screen of the Week) folder.
Here are three of the stocks that made it through the screen this week:
AdvanSix Inc. (ASIX)
SkyWest, Inc. (SKYW)
SYNNEX Corporation (SNX)
Sign up now for your two-week free trial to the Research Wizard and get the rest of the stocks on this list. Remember, the key to successful screening is in discovering those screens that have produced profitable results in the past. That's exactly what you get with the Research Wizard stock picking and backtesting program
Click here to sign up for a free trial to the Research Wizard today.
Want more articles from this author? Scroll up to the top of this article and click the FOLLOW AUTHOR button to get an email each time a new article is published.
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/.
Today's Stocks from Zacks' Best Screens
Now would you like to screen for the latest stocks from Zacks' most successful strategies? From 2017 through 2018, while the market gained +15.8%, we saw results like these: Big Money Zacks +38.0%, Small-Cap Growth +61.3%, Technical Analysis & Fundamental Analysis +61.6%, New Highs +68.1%, and Filtered Zacks Rank 5 +98.3%.
You're invited to screen the latest stocks in seconds by trying Zacks' Research Wizard stock-picking program. Or use the Wizard to create your own market-beating strategies. No credit card needed, no cost or obligation.
Try it for 2 weeks free >>
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
SYNNEX Corporation (SNX) : Free Stock Analysis Report
SkyWest, Inc. (SKYW) : Free Stock Analysis Report
AdvanSix Inc. (ASIX) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research