Buy 5 High ROE Stocks as Fed Holds Rates, Promises 3 Cuts
The leading benchmark indices notched all-time closing highs yesterday as the Federal Reserve held interest rates steady, in line with widespread expectations. Despite the federal funds rate level (in the range between 5.25% and 5.50%) being the highest in more than 23 years, the Fed kept the rates unchanged and pledged to cut the same thrice in 2024. This propelled the stock markets to record highs on optimism that the rate cuts will buoy the economic growth, which is projected to grow at a 2.1% annualized rate, up from 1.4% expected in December.
The recent spate of inflationary pressures, like that exhibited by the high Producer Price Index reading for February, had cast doubts over Fed’s proposed rate cuts this year. The higher-than-expected inflation data in the first two months of 2024 triggered caution from some Fed officials, while the markets appeared vulnerable to sudden downtrends owing to tempered expectations. However, following its two-day policy meeting, the central bank kept its benchmark borrowing rate unchanged and penciled in three quarter-percentage-point cuts by the end of 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. Iron Mountain Incorporated IRM, Suzano S.A. SUZ, Tapestry, Inc. TPR, Meta Platforms, Inc. META and W. R. Berkley Corporation WRB 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 10 stocks that qualified the screening:
Iron Mountain: Boston, MA-based Iron Mountain provides records & information management services and data center space & solutions in 59 countries. The company primarily generates revenues from storage rental and services. Storage rental revenues are generated through periodic rental charges for data storage. Service revenues comprise charges for related core service activities and a wide array of complementary products and services.
It has a long-term earnings growth expectation of 4%. It delivered a trailing four-quarter earnings surprise of 2.5%, on average. Iron Mountain sports a Zacks Rank #1. 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.
The company offers coated and uncoated printing and writing papers, paperboards, tissue papers and lignin. Suzano carries a Zacks Rank #2.
Tapestry: Founded in 1941 and headquartered in New York, Tapestry (formerly known as Coach, Inc.) is the designer and marketer of fine accessories and gifts for women and men in the United States and internationally. The company offers lifestyle products, which include handbags, women’s and men’s accessories, footwear, jewelry, seasonal apparel collections, sunwear, travel bags, fragrances and watches.
Tapestry has a long-term earnings growth expectation of 11.5% and delivered a trailing four-quarter earnings surprise of 11.7%, on average. This Zacks Rank #2 stock has a VGM Score of A.
Meta: Headquartered in Menlo Park, CA, Meta is the world’s largest social media platform. The company’s portfolio offering evolved from a single Facebook app to multiple photo and video-sharing apps like Instagram and WhatsApp through acquisitions.
The company has a long-term earnings growth expectation of 19.5% and delivered a trailing four-quarter earnings surprise of 19.7%, on average. Meta sports a Zacks Rank #1.
W. R. Berkley: Founded in 1967 and based in Greenwich, CT., W.R. Berkley is one of the nation’s largest commercial lines property casualty insurance providers. The company offers a variety of insurance services, from reinsurance to workers comp third-party administrators.
It has a long-term earnings growth expectation of 9%. It has a VGM Score of B. Currently, W.R. Berkley carries a Zacks Rank #2.
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.
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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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Iron Mountain Incorporated (IRM) : Free Stock Analysis Report
W.R. Berkley Corporation (WRB) : Free Stock Analysis Report
Tapestry, Inc. (TPR) : Free Stock Analysis Report
Suzano S.A. Sponsored ADR (SUZ) : Free Stock Analysis Report
Meta Platforms, Inc. (META) : Free Stock Analysis Report
