Buy 5 High ROE Stocks as Markets Slide on Tech-Sector Woes

The broader U.S. equity markets witnessed a steady downtrend over the past couple of trading days after registering their first closing record since November 2021 last week. The uptrend was buoyed by healthy inflation data, with the core personal consumption expenditures price index for January increasing 0.4% month-over-month and 2.8% on a year-over-year basis – on par with broad-based expectations. The optimism was further boosted by AI-focused thrust.

However, the gain was more than wiped off as markets were pulled back by sharp declines witnessed by leading blue-chip firms from the technology sector. With a loss of more than 2%, the S&P 500′s information technology sector dragged the broader index down. Although the decline appeared to be mostly cyclical on the surface, investors would like to seek more clarity from Fed Chair Jerome Powell on the monetary policy, as he heads to Capitol Hill for his congressionally mandated testimony before the House.

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. Iron Mountain Incorporated IRM, Suzano S.A. SUZ, Tapestry, Inc. TPR, HCA Healthcare, Inc. HCA and W. R. Berkley Corporation WRB are some of the stocks with high ROE to profit from.

ROE: A Key Metric

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:

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.

It has a long-term earnings growth expectation of 4%. It delivered a trailing four-quarter earnings surprise of 2.5%, on average. Iron Mountain carries a Zacks Rank #2. 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 carries a Zacks Rank #2.

Tapestry: Founded in 1941 and headquartered in New York, Tapestry (formerly known as Coach, Inc.) is the designer and marketer of fine accessories and gifts for women and men in the United States and internationally. The company offers lifestyle products, which include handbags, women’s and men’s accessories, footwear, jewelry, seasonal apparel collections, sunwear, travel bags, fragrances and watches.   

Tapestry has a long-term earnings growth expectation of 11.5% and delivered a trailing four-quarter earnings surprise of 11.7%, on average. This Zacks Rank #2 stock has a VGM Score of A.

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.

W. R. Berkley: Founded in 1967 and based in Greenwich, CT., W.R. Berkley is one of the nation’s largest commercial lines property casualty insurance providers. The company offers a variety of insurance services, from reinsurance to workers comp third-party administrators.

It has a long-term earnings growth expectation of 9%. It has a VGM Score of A. Currently, W.R. Berkley 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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Iron Mountain Incorporated (IRM) : Free Stock Analysis Report

W.R. Berkley Corporation (WRB) : Free Stock Analysis Report

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

Tapestry, Inc. (TPR) : 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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