Buy 5 High ROE Stocks as Markets Brace for 25 Bps Rate Hike

·6-min read

The U.S. equity markets appeared to have regained their lost footing after the Swiss government brokered a deal for the forced takeover of the ailing Credit Suisse by UBS for 3 billion Swiss francs ($3.2 billion). With more than $5 trillion in assets, the combined bank is expected to provide the much-needed stability in the global banking system after the sudden Silicon Valley Bank collapse and Credit Suisse turmoil sent shockwaves through the markets, likely propelling the uptrend.

The markets also seemed to have factored in a quarter basis point (bp) hike in the interest rate by the Fed despite a better-than-expected inflation reading. The consumer price index for February came in at 0.4% on a monthly basis and 6% annual pace, slightly lower than January’s inflation data of 0.5% and 6.4% respectively. The Fed had earlier raised the interest rates by 25 bps – much akin to the broader expectations – and kept the door ajar for future hikes as it indicated that the battle against inflation was far from over. It also expected economic growth to remain subdued in 2023.

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. AutoNation, Inc. AN, Atkore Inc. ATKR, Valero Energy Corporation VLO, Hologic, Inc. HOLX and Ryder System, Inc. R 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.

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 15 stocks that qualified the screen:

AutoNation: Incorporated in Delaware in 1991, AutoNation is the largest automotive retailer in the United States. Apart from retailing new and used vehicles, the company offers vehicle maintenance and repair services, vehicle parts, extended service contracts, vehicle protection products and other aftermarket products. In addition, it arranges financing for vehicle purchases through third-party sources.

It delivered a trailing four-quarter earnings surprise of 4.8%, on average. It has a VGM Score of B. Currently, AutoNation carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Atkore: Headquartered in Harvey, IL, Atkore offers conduits, cables, and installation accessories in the United States and internationally. With a network of manufacturing and distribution facilities worldwide, Atkore is a leading provider of electrical, safety and infrastructure solutions.

Atkore carries a Zacks Rank #2. It delivered a trailing four-quarter earnings surprise of 14.1%, on average.   

Valero Energy: San Antonio, TX-based Valero Energy is the largest independent refiner and marketer of petroleum products in the United States. The company was founded in 1980. Valero Energy has a refining capacity of 3.1 million barrels per day across 15 refineries throughout the United States, Canada and the United Kingdom.  

The company has a long-term earnings growth expectation of 6% and delivered a trailing four-quarter earnings surprise of 19%, on average. Valero Energy sports a Zacks Rank #1.

Hologic: Headquartered in Bedford, MA, Hologic develops, manufactures and supplies diagnostics, medical imaging systems and surgical products that cater to the healthcare needs of women. The company is currently focusing on expanding its business across the patient continuum of care and has launched software products based on its investments in artificial intelligence.

The company has a long-term earnings growth expectation of 15.2% and delivered a trailing four-quarter earnings surprise of 30.6%, on average. Hologic carries a Zacks Rank #2.

Ryder: Florida-based Ryder is recognized as one of the world's largest providers of integrated logistics and transportation solutions. Ryder’s customers range from small businesses to large international enterprises. They are from a wide variety of industries, the most significant of which are automotive, electronics, transportation, grocery, lumber and wood products, food service and home furnishing.   

Ryder delivered a trailing four-quarter earnings surprise of 21.8%, on average. It has a VGM Score of A. It sports a Zacks Rank #1.

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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Ryder System, Inc. (R) : Free Stock Analysis Report

Valero Energy Corporation (VLO) : Free Stock Analysis Report

AutoNation, Inc. (AN) : Free Stock Analysis Report

Hologic, Inc. (HOLX) : Free Stock Analysis Report

Atkore Inc. (ATKR) : Free Stock Analysis Report

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