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Top 5 Stocks With High ROE to Buy in a Volatile Market

Over the past few trading days, the U.S. equity markets witnessed a roller-coaster ride as a four-week winning streak — the longest rally since November 2021 — was annulled by a sudden slide at the beginning of the week. The markets were pressed by uncertainty owing to the Fed’s stance to hold interest rates steady while keeping the door ajar for another hike before the end of the year.

However, the markets were back on the growth trajectory on the following day as bond yields dipped. The uptrend was further buoyed by the latest consumer confidence report, which revealed that U.S. consumer confidence rose in November to 102.0 after three straight monthly declines. The data showed that consumers were likely to spend more in the near term on signs that inflation was abating.

The rise in buying intentions portrays the strength in the economy and steady labor market conditions, with Americans planning big-ticket purchases like motor vehicles and houses over the next six months. The latest GDP data also reveal that the economy grew in the third quarter at a stronger-than-forecast annual rate of 5.2%.

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. NRG Energy, Inc. NRG, Thomson Reuters Corporation TRI, Iron Mountain Incorporated IRM, Cboe Global Markets, Inc. CBOE and Arch Capital Group Ltd. ACGL 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.

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 screening:

NRG Energy: Headquarters in Houston, TX, NRG Energy is engaged in the production, sale and delivery of energy and energy products and services to residential, industrial as well as commercial consumers in major competitive power markets in the United States. The company also provides system power, distributed generation, renewable products, backup generation, energy efficiency and advisory services, as well as carbon management and specialty services.

The stock delivered a trailing four-quarter earnings surprise of 4.7%, on average. NRG Energy carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Thomson Reuters: Based in Toronto, Canada, Thomson Reuters serves professionals across legal, tax, accounting, compliance, government and media sectors. Its products combine highly specialized software and insights to empower professionals with the data, intelligence and solutions needed to make informed decisions with transparency.

Thomson Reuters has a long-term earnings growth expectation of 11.1% and delivered a trailing four-quarter earnings surprise of 12.2%, on average. It carries a Zacks Rank #2.

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.

Iron Mountain carries a Zacks Rank #2. It has a long-term earnings growth expectation of 4% and delivered a trailing four-quarter earnings surprise of 2.1%, on average.

Cboe Global Markets: Based in Chicago, IL, Cboe Global Markets is one of the largest stock exchange operators by volume in the United States and a leading market globally for ETP trading. It offers trading across a diverse range of products in multiple asset classes and geographies, including options, futures, U.S. and European equities, ETPs, global foreign exchange and multi-asset volatility products based on the VIX Index.

The company has a long-term earnings growth expectation of 10.2% and delivered a trailing four-quarter earnings surprise of 4.1%, on average. Cboe Global Markets sports a Zacks Rank #1.

Arch Capital: Headquartered in Pembroke, Bermuda, Arch Capital offers insurance, reinsurance and mortgage insurance across the world. It provides a wide range of products and services, which include primary and excess casualty coverages, professional indemnity, workers’ compensation and umbrella liability and employers’ liability insurance coverages. The company offers a full range of property, casualty and mortgage insurance and reinsurance lines while maintaining a focus on writing specialty lines of insurance and reinsurance.

Arch Capital sports a Zacks Rank #1. It has a long-term earnings growth expectation of 10%. It delivered a trailing four-quarter earnings surprise of 35.2%, on average. It has a VGM Score of A.

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.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

NRG Energy, Inc. (NRG) : Free Stock Analysis Report

Iron Mountain Incorporated (IRM) : Free Stock Analysis Report

Thomson Reuters Corp (TRI) : Free Stock Analysis Report

Cboe Global Markets, Inc. (CBOE) : Free Stock Analysis Report

Arch Capital Group Ltd. (ACGL) : Free Stock Analysis Report

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