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5 Stocks With High ROE as Markets Await Fed Tapering Outlook
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The U.S. equity markets have remained overtly cautious over the past few trading sessions with broad-based expectations of a clear-cut picture emerging from the latest Fed meeting regarding its monthly $120 billion bond buying program. The Fed is likely to offer a policy statement revealing the framework for the tapering along with the economic and interest rate forecasts and inflationary pressures. The outlook is likely to be influenced by soft job market conditions, the resurgence of coronavirus cases with the spread of the Delta variant, a mounting U.S. debt, and the meltdown of China-based property giant Evergrande. Nevertheless, there appears to be a consensus that the Fed would scale back its bond-buying program by the year-end if the conditions remain conducive for a speedy economic recovery.
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 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 22 stocks that qualified the screen:
OneMain Holdings, Inc. (OMF - Free Report) : Based in Evansville, IN, OneMain Holdings is a financial service holding company engaged in the consumer finance and insurance businesses. With approximately 1,400 locations across 44 states, it is reportedly the country’s largest near-prime installment lender. This Zacks #2 Ranked firm delivered a trailing four-quarter earnings surprise of 53.2%, on average.
KLA Corporation (KLAC - Free Report) : 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 earnings surprise of 7.9%, on average, and has a long-term earnings growth expectation of 16.2%. KLA Corporation carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Bunge Limited (BG - Free Report) : Headquartered in St. Louis, MO, Bunge, with more than two centuries of experience, operates as an agribusiness and food company., It has above 23,000 dedicated employees working across approximately 300 facilities located in more than 40 countries. This Zacks #2 Ranked company delivered a trailing four-quarter earnings surprise of 347.1%, on average.
CBRE Group, Inc. (CBRE - Free Report) : Headquartered in Dallas, TX, CBRE is a commercial real estate services and investment firm, offering a wide range of services to tenants, owners, lenders, and investors in office, retail, industrial, multi-family, and other types of commercial real estates in all major metropolitan areas across the globe. With more than 100,000 employees, the company serves clients in above 100 countries. This Zacks #1 Ranked company has a long-term earnings growth expectation of 11%. The company delivered a trailing four-quarter earnings surprise of 53.5%, on average.
Regeneron Pharmaceuticals, Inc. (REGN - Free Report) : Tarrytown, NY-based Regeneron is a biotechnology company focused on the discovery, development, and commercialization of treatments targeting serious medical conditions. The company delivered a trailing four-quarter earnings surprise of 18.7%, on average. This Zacks Rank #1 stock has a long-term earnings growth expectation of 16.3%.
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.
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.
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.
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5 Stocks With High ROE as Markets Await Fed Tapering Outlook
The U.S. equity markets have remained overtly cautious over the past few trading sessions with broad-based expectations of a clear-cut picture emerging from the latest Fed meeting regarding its monthly $120 billion bond buying program. The Fed is likely to offer a policy statement revealing the framework for the tapering along with the economic and interest rate forecasts and inflationary pressures. The outlook is likely to be influenced by soft job market conditions, the resurgence of coronavirus cases with the spread of the Delta variant, a mounting U.S. debt, and the meltdown of China-based property giant Evergrande. Nevertheless, there appears to be a consensus that the Fed would scale back its bond-buying program by the year-end if the conditions remain conducive for a speedy economic recovery.
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 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 22 stocks that qualified the screen:
OneMain Holdings, Inc. (OMF - Free Report) : Based in Evansville, IN, OneMain Holdings is a financial service holding company engaged in the consumer finance and insurance businesses. With approximately 1,400 locations across 44 states, it is reportedly the country’s largest near-prime installment lender. This Zacks #2 Ranked firm delivered a trailing four-quarter earnings surprise of 53.2%, on average.
KLA Corporation (KLAC - Free Report) : 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 earnings surprise of 7.9%, on average, and has a long-term earnings growth expectation of 16.2%. KLA Corporation carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Bunge Limited (BG - Free Report) : Headquartered in St. Louis, MO, Bunge, with more than two centuries of experience, operates as an agribusiness and food company., It has above 23,000 dedicated employees working across approximately 300 facilities located in more than 40 countries. This Zacks #2 Ranked company delivered a trailing four-quarter earnings surprise of 347.1%, on average.
CBRE Group, Inc. (CBRE - Free Report) : Headquartered in Dallas, TX, CBRE is a commercial real estate services and investment firm, offering a wide range of services to tenants, owners, lenders, and investors in office, retail, industrial, multi-family, and other types of commercial real estates in all major metropolitan areas across the globe. With more than 100,000 employees, the company serves clients in above 100 countries. This Zacks #1 Ranked company has a long-term earnings growth expectation of 11%. The company delivered a trailing four-quarter earnings surprise of 53.5%, on average.
Regeneron Pharmaceuticals, Inc. (REGN - Free Report) : Tarrytown, NY-based Regeneron is a biotechnology company focused on the discovery, development, and commercialization of treatments targeting serious medical conditions. The company delivered a trailing four-quarter earnings surprise of 18.7%, on average. This Zacks Rank #1 stock has a long-term earnings growth expectation of 16.3%.
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.
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.