Top 5 ROE Stocks To Buy On Renewed Fed Optimism

The U.S. equity markets gathered steam yesterday as the Federal Reserve chairman Jerome Powell indicated a slower approach to increasing interest rates. Despite the Federal Open Market Committee, the Fed’s policy-making body, raising the federal funds rate thrice this year, Powell indicated a dovish stance with reference to future rate hikes. He dropped hints that the Fed would apply a relatively slower-than-anticipated approach to increasing interest rates in the near future. On the cue, stocks witnessed a steep climb and allayed investor fears.

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.

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 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.

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 10 stocks that qualified the screen:

The Progressive Corporation (NYSE:PGR) : Based in Mayfield Village, OH, Progressive is one of the major auto insurers in the country. Founded in 1965, the company is a leading independent agency writer of private passenger auto coverage. It has a trailing four-quarter average positive earnings surprise of 13.5% and long-term earnings growth expectation of 7.3%. Progressive currently has a Zacks Rank #2.

Waste Management, Inc. (NYSE:WM) : Headquartered in Houston, TX, Waste Management is the largest provider of comprehensive waste-management services in North America. This Zacks #2 Ranked stock has a trailing four-quarter average positive earnings surprise of 4.5% and long-term earnings growth expectation of 12.3%.

Celanese Corporation (NYSE: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 the market share. The company has a trailing four-quarter average positive earnings surprise of 13.3% and long-term earnings growth projection of 10%. Celanese has Zacks Rank of 2, at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

CBRE Group, Inc. (NYSE: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 6.2% and long-term earnings growth expectation of 13%. Currently, CBRE Group carries a Zacks Rank #2.

General Motors Company (NYSE:GM) : Detroit, MI-based General Motors is a leading global automotive company, which is engaged in designing, building and selling cars, trucks, crossovers and automobile parts worldwide. This Zacks Rank #2 stock has a trailing four-quarter average positive earnings surprise of 21.8% and long-term earnings growth expectation of 8.5%.

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.

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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.