Buy 5 High ROE Stocks as Market Rally Skids on ADP Jobs Data
After a spate of solid performances recently, the U.S. equity market witnessed a sudden downtrend in the middle of a holiday-shortened week, courtesy investors’ broad-based concerns regarding the state of the overall economy and the trajectory of interest rate hikes. The decline was largely triggered by better-than-expected jobs data from payroll processing firm ADP, which fueled fears that the Federal Reserve will likely resume its aggressive rate hike regime. Although the ADP data is often considered unreliable and more volatile than other employment data, it has caused quite a stir ahead of the official June payroll report due today.
The equity market rally was primarily driven by the Fed’s decision to hit a pause button for the rate hike program owing to a slowdown in inflation and maintain a benchmark interest rate in the range of 5-5.25%. However, the minutes from the Jun 13-14 Fed meeting revealed that more rate hikes are in the cards to bring inflation close to the targeted 2% level.
The latest ADP jobs report seemed to incite these rate hike fears with private sector jobs increasing by 497,000 in June, significantly higher than broad-based expectations of a 220,000 rise. The more than two-fold increase has ratcheted up the fear factor that dragged the shares down. The focus has now shifted to the Fed’s Jul 25-26 policy meeting, which is likely to be another potential market catalyst.
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. Dillard's, Inc. DDS, Suzano S.A. SUZ, Atkore Inc. ATKR, Nexstar Media Group, Inc. NXST and AbbVie Inc. ABBV 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 11 stocks that qualified the screen:
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 110.4%, on average. DDS carries a Zacks Rank #2. It has a VGM Score of A. 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.
AbbVie: North Chicago, IL-based AbbVie has become one of the top-most pharma companies after it acquired Botox maker Allergan in a cash-and-stock deal for $63 billion in May 2020. The deal has transformed AbbVie’s portfolio by lowering its dependence on Humira, its flagship product, which has lost patent protection in Europe and the United States.
The company has a long-term earnings growth expectation of 5% and delivered a trailing four-quarter earnings surprise of 1.8%, on average. AbbVie 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.
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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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Dillard's, Inc. (DDS) : Free Stock Analysis Report
Nexstar Media Group, Inc (NXST) : Free Stock Analysis Report
AbbVie Inc. (ABBV) : Free Stock Analysis Report
Atkore Inc. (ATKR) : Free Stock Analysis Report
Suzano S.A. Sponsored ADR (SUZ) : Free Stock Analysis Report
