5 High ROE Stocks to Bet on as Markets Sway Whimsically

Over the past few trading days, the broader U.S. equity markets witnessed a roller-coaster ride as stocks swayed in accordance with recent market developments. At the beginning of the past week, the stocks were hard hit as fresh inflation data raised concerns about the Federal Reserve’s pledge for a slew of rate cuts this year. The U.S. consumer price index for January was up 0.3% month-over-month and 3.1% on a year-over-year basis. This compared unfavorably with broad-based expectations of 0.2% and 2.95, respectively, triggering a sudden downtrend.

Mid-way through the week, stocks closed at record highs riding on solid quarterly performance by some blue-chip firms. The stock market resilience, as exhibited by the 11th record high mark that the benchmark index cinched so far this year, more than offset the decline. However, the market slid on the following day as fresh inflation data rattled investors. Recent data revealed that the producer price index for January, a measure of wholesale inflation, increased 0.3% against broad-based expectations of a gain of 0.1%.   

To add to the woes, Fed governor Christopher Waller indicated that the easing of monetary policy might come slower than anticipated, although the Fed had earlier pledged to cut interest rates several times in 2024 owing to a slowdown in inflation in the later stages of 2023. Given the recent inflationary data, the markets appear vulnerable to sudden downtrends. This, in turn, signifies that the markets need to brace for intense volatility owing to tempered expectations despite a relatively healthy U.S. economy and GDP data.

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. Arch Capital Group Ltd. ACGL, Suzano S.A. SUZ, Carlisle Companies Incorporated CSL, HCA Healthcare, Inc. HCA and América Móvil, S.A.B. de C.V. AMX 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.

Parameters Used for Screening

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 screening:

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.

It has a long-term earnings growth expectation of 10%. It delivered a trailing four-quarter earnings surprise of 27.3%, on average. It has a VGM Score of B. Arch Capital sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Suzano: Headquartered in Salvador, Brazil, Suzano produces and sells eucalyptus pulp and paper products. With more than 90 years of experience, this vertically integrated firm is one of the largest producers of paper and graphic products in South America.   

The company offers coated and uncoated printing and writing papers, paperboards, tissue papers and lignin. Suzano sports a Zacks Rank #1.

Carlisle: Based in the Scottsdale, AZ, Carlisle is a diversified, global portfolio of niche brands and businesses with highly engineered and high margin products. It engages in the design, manufacture and sale of a wide range of roofing and waterproofing products, engineered products and finishing equipment. The company sells its products in the United States, Europe, Asia, Canada, Mexico, Latin America, the Middle East and Africa.   

Carlisle has a long-term earnings growth expectation of 15% and delivered a trailing four-quarter earnings surprise of 7.6%, on average. It has a VGM Score of B. It sports a Zacks Rank #1.

HCA Healthcare: Headquartered in Nashville, TN, HCA Healthcare is the largest non-governmental operator of acute care hospitals in the United States. It operates 186 hospitals and approximately 2,400 ambulatory sites of care, including surgery centers, freestanding emergency rooms, urgent care centers and physician clinics, in 20 states and the United Kingdom.

The company has a long-term earnings growth expectation of 9.7% and delivered a trailing four-quarter earnings surprise of 9.8%, on average. It has a VGM Score of A. HCA Healthcare sports a Zacks Rank #1.

América Móvil: Based in Mexico City, America Movil is the leading provider of integrated telecommunications services in Latin America. It offers enhanced communications solutions in 25 countries in Latin America, the United States and Central and Eastern Europe.

It has a long-term earnings growth expectation of 8.1%. It has a VGM Score of A. Currently, America Movil 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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America Movil, S.A.B. de C.V. Unsponsored ADR (AMX) : Free Stock Analysis Report

Carlisle Companies Incorporated (CSL) : Free Stock Analysis Report

HCA Healthcare, Inc. (HCA) : Free Stock Analysis Report

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

Suzano S.A. Sponsored ADR (SUZ) : Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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