Buy 5 Stocks With High ROE as Bond Yields Subside Steadily
Despite an initial setback triggered by the sudden outbreak of the Israel-Hamas war, the U.S. equity markets witnessed a steady uptrend over the past few trading sessions as bond yields subsided. As rising geopolitical tensions and volatility in oil prices forced investors to seek refuge in the less risky bond asset portfolio, bond prices surged while yields fell considerably, propelling the stocks higher.
The uptrend was further buoyed by a solid September jobs report that portrayed a better-than-expected 336,000 job addition. While the unemployment rate was 3.8%, average hourly earnings were up 0.2% for the month and 4.2% from a year ago compared with respective estimates of 0.3% and 4.3%. This partially negated the rate hike fears as the Federal Reserve kept the road ajar for another hike before the end of the 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. ON Semiconductor Corporation ON, Dillard's, Inc. DDS, Valero Energy Corporation VLO, Upbound Group, Inc. UPBD and AGNC Investment Corp. AGNC 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 21 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 carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Valero: San Antonio, TX-based Valero Energy is the largest independent refiner and marketer of petroleum products in the United States. The company was founded in 1980. It has a refining capacity of 3.1 million barrels per day across 15 refineries throughout the United States, Canada and the United Kingdom.
Valero carries a Zacks Rank #2. It has a long-term earnings growth expectation of 6% and delivered a trailing four-quarter earnings surprise of 9%, on average. It has a VGM Score of A.
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. Upbound Group carries a Zacks Rank #2. It has a VGM Score of A.
AGNC Investment: Previously known as American Capital Agency Corp., AGNC Investment is a real estate investment trust (REIT) that focuses on leveraged investments in Agency residential mortgage-backed securities. This includes residential mortgage pass-through securities and collateralized mortgage obligations.
Atkore carries a Zacks Rank #2. It delivered a trailing four-quarter earnings surprise of 14.8%, on average.
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
Valero Energy Corporation (VLO) : Free Stock Analysis Report
AGNC Investment Corp. (AGNC) : Free Stock Analysis Report
ON Semiconductor Corporation (ON) : Free Stock Analysis Report
Upbound Group, Inc. (UPBD) : Free Stock Analysis Report
