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Top 5 Stocks With High ROE to Buy as Recession Fears Rise

·6 min read

Despite a healthy start to the June-quarter earnings that triggered a short-term rally, the markets witnessed intense volatility in the past few trading sessions as Walmart cut its earnings forecast on rising food inflation. This created a ripple effect on the broader equity market, and stocks mostly trended down across sectors. As the high inflationary pressure refuses to abate, the Fed is likely to continue with its aggressive rate hike policy. It is widely expected to announce another 75-basis point hike in its latest policy meeting. The Fed aims to enforce similar increases in the remainder of the year to restore price stability.

Investors also await clarity regarding the future interest rate path and its likely impact on the stock market. The central bank had earlier offered a broad outline of its reduction in asset holdings for monetary tightening. The Fed intends to reduce Treasury holdings and mortgage-backed securities by $30 billion and $17.5 billion, respectively, from June and extend the tallies to $65 billion and $35 billion after three months. Despite these initiatives, experts remain highly anxious about a probable recession later this year and aim to look for cues about the U.S. economy from the Fed policy meeting details.

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. Marriott International, Inc. MAR, NetApp, Inc. NTAP, Jabil Inc. JBL, Matson, Inc. MATX and United States Steel Corporation X are some of the stocks with high ROE to profit.

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.

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 18 stocks that qualified the screen:

Marriott International, Inc.: Headquartered in Bethesda, MD, Marriott is a leading worldwide hospitality company focused on lodging management and franchising. It boasts a portfolio of more than 8,000 properties under 30 leading brands spanning 139 countries and territories.

Marriott delivered a trailing four-quarter earnings surprise of 36.2%, on average. It has a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

NetApp, Inc.: NetApp provides enterprise storage, data management software and hardware products and services. The Sunnyvale, CA-based company’s product line comprises two storage platforms - FAS storage platform and E-Series platform.

The company has a long-term earnings growth expectation of 8.8% and delivered a trailing four-quarter earnings surprise of 12.6%, on average. NetApp carries a Zacks Rank #2.

Jabil Inc.: Headquartered in St. Petersburg, FL, Jabil is one of the largest global suppliers of electronic manufacturing services. The company offers electronics design, production, product management and after-market services to customers catering to aerospace, automotive, computing, consumer, defense, industrial, instrumentation, medical, networking, peripherals, storage and telecommunications industries.

Jabil carries a Zacks Rank #2. The company has a long-term earnings growth expectation of 12%. The company delivered a trailing four-quarter earnings surprise of 8.5%, on average.

Matson, Inc.: Headquartered in Honolulu, Hawaii, Matson offers ocean transportation and logistics services to the U.S. military, freight forwarders, retailers, consumer goods, automobile manufacturers and other customers. The company provides a vital lifeline to the domestic non-contiguous economies of Hawaii, Alaska and Guam and other island economies in Micronesia.  

This Zacks #2 Ranked company delivered a trailing four-quarter earnings surprise of 2.1%, on average. Matson’s fleet of owned and chartered vessels includes containerships, combination containers and custom-designed barges.

United States Steel Corporation: Pittsburgh, PA-based United States Steel Corp. is a leading steel manufacturer in the United States and the fifth largest in the world. It produces and sells steel mill products – including flat-rolled and tubular products – in North America and Europe.  

U.S. Steel is actively engaged in improving its cost structure and operations through actions such as the shutdown of operations, manufacturing process/logistics improvements and savings on selling, and general and administrative expenses. U.S. Steel 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.  

The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.

Click here to sign up for a free trial to the Research Wizard today.

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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Marriott International, Inc. (MAR) : Free Stock Analysis Report
 
United States Steel Corporation (X) : Free Stock Analysis Report
 
NetApp, Inc. (NTAP) : Free Stock Analysis Report
 
Jabil, Inc. (JBL) : Free Stock Analysis Report
 
Matson, Inc. (MATX) : Free Stock Analysis Report
 
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