Top 5 ROE Stocks To Buy As Markets Rebound

Recovering from one of the steepest selloffs in months last week, the U.S. stock market is back in the positive territory as most benchmark indices recorded gains on a strong rally in tech and industrial stocks. It appears that the equity markets have shed skepticism about President Trump’s ability to deliver on his pro-growth promises that crept up when reports emerged that he had asked the then-FBI Director to discontinue an investigation on Russian meddling in the U.S. elections. However, sublime tensions between North Korea and the U.S. continue to raise an element of caution among investors.

Amid such an equivocal scenario, investors are often on the lookout for ‘cash cow’ stocks that will enable them to rake in higher returns.

However, singling out cash-rich stocks alone does not make for a solid investment proposition unless they 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.

ROE: A Key Metric

ROE = Net Income/Shareholders’ Equity

ROE helps investors distinguish between profit-generating companies from profit burners and is useful for 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 increasing its profits without investing new equity capital in the business and portrays management 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 one dollar 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 eight stocks that qualified the screen:

Lear Corporation (NYSE:LEA) : Headquartered in Southfield, MI, Lear is one of the leading manufacturers of automotive seating, electrical distribution systems, and related components across the globe. The company is celebrating its centenary year in 2017. This Zacks Rank #2 stock has a trailing four-quarter average earnings surprise of 8.7% and long-term earnings growth expectation of 7.1%.

International Consolidated Airlines Group (LON:ICAG), S.A. (OTC:ICAGY) : Based in Madrid, Spain, International Consolidated Airlines Group is one of the world's largest airline groups with 547 aircraft flying to 268 destinations and carrying more than 100 million passengers each year. It is the third largest group in Europe and the sixth largest in the world, based on revenue. This Zacks Rank #1 stock has a long-term earnings growth projection of 6.4%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Monsanto Company (NYSE:MON) : Founded in 2000 and headquartered in St. Louis, MO, Monsanto is a leading global provider of agricultural products. This Zacks Rank #2 stock has a healthy long-term earnings growth expectation of 12.1% and a stellar trailing four-quarter average earnings surprise of 313.9%.

Ternium S.A. (NYSE:TX) : Headquartered in Buenos Aires, Argentina, Ternium manufactures and processes various steel products in Latin America, the U.S., Central America, and internationally. This Zacks Rank #2 stock has a healthy trailing four-quarter average earnings surprise of 20.0% and long-term earnings growth projection of 18.4%.

Sandvik AB (OTC:SDVKY) : Headquartered in Stockholm, Sweden, Sandvik operates as a high-tech and global engineering firm in the field of rock excavation, metal-cutting, and materials technology. The company has a Zacks Rank #2 and a Value Growth Momentum Score (VGM Score) of ‘B’.

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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