Top 5 ROE Picks as Markets Ride on Additional Stimulus Hopes
Keeping up with the festive spirit, the U.S. equity markets shrugged off the lower-than-expected job growth data per the November jobs report and traded near historic highs in the past few trading sessions. The latest data released by the Bureau of Labor Statistics revealed that although the unemployment rate improved to 6.7%, the U.S. economy added only 245,000 compared with broad-based expectations of 469,000 job additions. Despite the dismal figures, the stock market rally was driven by renewed optimism about an additional stimulus to tide over the storm. With President-elect Joe Biden lending his support for adequate financial backing to stem further rot in the economy, the odds of a new stimulus package were raised higher.
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.
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 stocks 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 20 stocks that qualified the screen:
CDW Corporation CDW: Headquartered in Vernon Hills, IL, CDW Corporation is a leading provider of integrated information technology solutions to small, medium and large business, government, education and healthcare customers in the United States, the United Kingdom and Canada. This Zacks #2 Ranked company has a long-term earnings growth expectation of 13.1%. The company delivered a trailing four-quarter positive earnings surprise of 11.1%, on average.
Rockwell Automation, Inc. ROK: Based in Milwaukee, WI, Rockwell Automation provides industrial automation and information solutions worldwide. The company delivered a trailing four-quarter positive earnings surprise of 12.7%, on average. The Zacks Rank #2 company has a long-term earnings growth expectation of 9.3%.
Lam Research Corporation LRCX: Headquartered in Fremont, CA, Lam Research supplies wafer fabrication equipment and services to the semiconductor industry. This Zacks #2 Ranked company has a long-term earnings growth expectation of 16.5%. The company pulled off a trailing four-quarter earnings surprise of 6.9%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
KLA Corporation KLAC: San Jose, CA-based KLA Corporation is an original equipment manufacturer of process diagnostics and control equipment and yield management solutions required for the fabrication of semiconductor integrated circuits or chips. The company delivered a trailing four-quarter positive earnings surprise of 8.9%, on average. This Zacks Rank #2 company has a long-term earnings growth expectation of 11.6%.
Whirlpool Corporation WHR: Benton Harbor, MI-based Whirlpool Corporation, founded in 1955, is one of the largest manufacturers of home appliances in the world. The company delivered a trailing four-quarter positive earnings surprise of 70.3%, on average. This Zacks Rank #1 company has a long-term earnings growth expectation of 7.3%.
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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Whirlpool Corporation (WHR) : Free Stock Analysis Report
KLA Corporation (KLAC) : Free Stock Analysis Report
Lam Research Corporation (LRCX) : Free Stock Analysis Report
Rockwell Automation, Inc. (ROK) : Free Stock Analysis Report
CDW Corporation (CDW) : Free Stock Analysis Report
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