Top 5 ROE Picks as Trade Dispute With China & Canada Lingers

The U.S. equity markets snapped its recent winning streak as President Trump decided to impose tariffs on $200 billion worth of imported goods from China. To add to the woes, U.S. negotiations with Canada fell flat as both the parties missed the Friday deadline to script a renewed NAFTA deal. While Trump has threatened to redraw the tripartite trade deal to a bilateral agreement centered around Mexico, Canada has also made it clear that it would not sign a deal until it benefits its citizens.

As investors employ a wait-and-see approach in a classic example of “backing and filling” in the market, they could benefit from ‘cash cow’ stocks that garner higher returns.

However, singling out cash-rich stocks alone does not make for a solid investment proposition unless these are backed by attractive efficiency ratios like return on equity (ROE). A high ROE ensures that the company is reinvesting its 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 stocks 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 less 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 14 stocks that qualified the screen:

Celgene Corporation CELG: Summit, NJ-based Celgene is a biopharmaceutical company focused on the discovery, development and commercialization of drugs targeting cancer and inflammatory diseases through next-generation solutions in protein homeostasis, immuno-oncology, epigenetic, immunology and neuro-inflammation. The company has a trailing four-quarter average positive earnings surprise of 2.4% and long-term earnings growth expectation of 21.8%. Celgene currently sports a Zacks Rank #1.

The Progressive Corporation PGR: Based in Mayfield Village, OH, Progressive is one of the major auto insurers in the country. Founded in 1965, it is a leading independent agency writer of private passenger auto coverage and the market share leader for the motorcycle products since 1998. The company has a Zacks Rank #1 along with a trailing four-quarter average positive earnings surprise of 9.2% and long-term earnings growth expectation of 7.3%.

CBRE Group, Inc. CBRE: Headquartered in Los Angeles, CBRE Group is a commercial real estate services and investment firm. It offers 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. The company has a trailing four-quarter average positive earnings surprise of 9.5% and long-term earnings growth expectation of 13%. CBRE Group carries a Zacks Rank #2.

NRG Energy, Inc. NRG: Headquartered in Princeton, NJ, NRG Energy is engaged in the production, sale and delivery of energy and energy products and services to residential, industrial as well as commercial consumers in major competitive power markets in the United States. The company has a trailing four-quarter average positive earnings surprise of 213.3%. NRG Energy currently sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Celanese Corporation CE: Texas-based Celanese is a global hybrid chemical company with diverse products that rank either first or second in their respective markets, based on market share. This Zacks Rank #1 stock has a trailing four-quarter average positive earnings surprise of 11.5% and long-term earnings growth projection of 10%.

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.

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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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NRG Energy, Inc. (NRG) : Free Stock Analysis Report
 
Celanese Corporation (CE) : Free Stock Analysis Report
 
The Progressive Corporation (PGR) : Free Stock Analysis Report
 
Celgene Corporation (CELG) : Free Stock Analysis Report
 
CBRE Group, Inc. (CBRE) : Free Stock Analysis Report
 
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