Find Top-Ranked Stocks to Buy that are Efficiently Generating Profits
The market was quiet on Monday as Wall Street waits for the Fed’s official decision and Jay Powell’s speech on Wednesday afternoon. That calm didn’t carry over into Tuesday, with stocks down across the board through morning trading.
The S&P 500 has slipped back below its 50-day and 21-day moving averages during the first several weeks of a notoriously rough month for stocks. This isn’t unfamiliar territory for the benchmark and it is trending back toward oversold RSI levels--when its mid-August rally began. But investors should pay attention to how the S&P 500 interacts with its key moving averages in the coming days and weeks.
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A growing worry for the market at the moment is rising oil prices, which will work directly against the Fed’s inflation fight. But the reason the Fed focuses on core inflation is partly because its policy rate isn’t able to impact global oil markets very much. Plus, Wall Street is still nearly 100% certain that the Fed will pause on Wednesday and remains rather confident that it is all but done hiking in 2023.
The end of Fed tightening, mixed with the impressive earnings outlook likely offers a bullish backdrop for stocks as we head closer to the fourth quarter.
Now let’s explore how to find ‘Strong Buy’ stocks with proven records of efficiently generating profits that investors might want to buy in September and heading into Q4.
ROE
Return on Equity or ROE helps investors understand if a firm’s executives are creating assets with investors’ cash or burning it. ROE shows a company’s ability to turn assets into profits. Put another way, this vital metric measures the profits made for each dollar of shareholder equity.
ROE is calculated as net income / shareholder's equity. For example: if $0.10 of assets are created for each $1 of shareholder equity that would equal a ROE of 10%.
Overall, Return on Equity is a great item to use regardless of what type of investor you are since it provides insight into management’s ability to create value and keep costs under control. Plus, if ROE slips, it can alert us to potential problems.
With all that said, let’s take a look at this screen’s parameters and see the companies proving they can return value to shareholders instead of churning through their cash…
• Zacks Rank equal to 1
The Zacks Rank looks at upward earnings estimate revisions, among other metrics, in order to find companies that are projected to see their earnings get stronger. In fact, beginning with a Zacks Rank #1 can be a great starting point because it boasts an average annual return of over 25% per year during the last 30 years.
• Price greater than or equal to 5
Today we ruled out any stocks that are trading for less than $5 a share because they can be more volatile and speculative.
• Price/Sales Ratio less than or equal to 1
On top of that, we are looking for a low price to sales ratio. Today we went with 1 or below as this range is usually thought to provide better value since investors pay less for each unit of sales.
• % (Broker) Rating Strong Buy equal to 100 (%)
In this screen, we decided to go with companies that brokers are fully on board with since ratings are typically skewed strongly toward ‘buy’ and ‘strong buy.’
• ROE greater than or equal to 10
Lastly, but most importantly for today’s screen, we got rid of any companies with Return on Equity of less than 10 because the median ROE value for all of the stocks in the Zacks Universe is under 10.
Here are two of the 15 stocks that made it through today’s screen…
Modine Manufacturing (MOD)
Modine is a standout in the thermal management technology and solutions space. Modine’s climate solutions and performance technologies segments aim to help improve air quality, as well as reduce energy and water consumption. Modine’s offerings also help lower what it calls “harmful emissions” to enable “cleaner running vehicles and environmentally friendly refrigerants.”
Modine shares have skyrocketed roughly 640% in the last three years to crush the Zacks Auto-Tires Trucks sector’s 4%. MOD has also outpaced the S&P 500 during this stretch and over the last decade, up 212% vs. 167%.
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Modine has slipped recently off its highs, but still trades above its 50-day moving average and 6% below its average Zacks price target. Even though it has easily outperformed its sector, Modine trades at a 33% discount at 14.5X forward 12-month earnings. And Modine’s ROE sits at 23.9% vs. its industry’s 2.9% average.
Zacks estimates call for Modine’s revenue to climb 9% in its fiscal 2023 and another 7% in FY24. Meanwhile, its adjusted earnings are projected to soar 47% and 13%, respectively over this stretch. MOD has also beaten our adjusted earnings estimates by an average of 45% over the trailing four periods.
Vistra (VST)
Vistra is a leading integrated retail electricity and power generation company. Vistra brings its products and services to market in roughly 20 states, helping to serve nearly 4 million residential, commercial, and industrial retail customers with electricity and natural gas.
Vistra is also one of the largest competitive electricity providers in the country and offers over 50 renewable energy plans. VST’s diverse portfolio includes natural gas, nuclear, solar, battery energy storage facilities, and more.
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Vistra’s earnings outlook continues to improve for both 2023 and 2024. VST’s revenue is projected to soar 46% this year and another 7% next year. And it is projected to swing from an adjusted loss of -$2.94 a share to +$3.11 per share this year and then surge another 38% next year.
VST shares have climbed 30% in the last year, including a 30% run in the past six months. This is part of an 86% run over the last three years to blow away the Zacks Utilities sector’s 3% decline. Plus, it still trades 7% below its average Zacks price target. Yet, Vistra trades at a 36% discount to its sector at 8.5X forward 12-month earnings. And its ROE comes in at 22.8% vs. its industry’s 9.8% average.
Get the rest of the stocks on this list and start looking for the newest companies that fit these criteria. It's easy to do. And it could help you find your next big winner. Start screening for these companies today with a free trial to the Research Wizard. You can do it.
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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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