Top ROE Stocks to Buy as AI Rally Propels Markets to Record Highs

Over the past couple of days, the broader equity markets hit the right chords by scaling all-time highs on the trot, led by the solid quarterly performance of AI behemoth NVIDIA and a healthy economy. With 56% revenue growth, NVIDIA’s quarterly results affirmed an AI boom that enthused investor confidence. The latest Commerce Department data further revealed that GDP grew at an annualized pace of 3.3% in the April-to-June period, exceeding broader estimates and portraying robust economic strength.

The core personal consumption expenditures price index for July was recorded at 2.9% - in line with broader estimates but higher than its June tally. Although the reading implied that inflation was a tad higher, it is not likely to derail the odds of a probable interest rate cut by the Federal Reserve in September.

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, such as return on equity (ROE). A high ROE ensures that the company is reinvesting cash at a high rate of return. Arista Networks Inc. ANET, TE Connectivity plc TEL, Corning Incorporated GLW, Banco Bilbao Vizcaya Argentaria, S.A. BBVA and AppLovin Corporation APP 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 13 stocks that qualified the screening:

Arista: Santa Clara, CA-based Arista is engaged in providing cloud networking solutions for data centers and cloud computing environments. The company offers Ethernet switches and routers optimized for next-generation data center networks. Arista holds a leadership position in 100-gigabit Ethernet switching for the high-speed datacenter segment. It is increasingly gaining market traction in 200- and 400-gig high-performance switching products and remains well-positioned for healthy growth in the data-driven cloud networking business with proactive platforms and predictive operations.

The company has a long-term earnings growth expectation of 16.6% and delivered a trailing four-quarter earnings surprise of 12.8%, on average. Arista carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here. 

TE Connectivity: Based in Galway, Ireland, TE Connectivity is a global technology company that designs and manufactures connectivity and sensor solutions for a wide range of industries, including automotive, aerospace, defense, energy and medical. With operations in more than 130 countries, TE Connectivity focuses on emerging technologies such as 5G, electric vehicles, industrial automation and smart cities to position itself at the forefront of connectivity advancements. 

TE Connectivity carries a Zacks Rank #2. The company has a long-term earnings growth expectation of 9.8% and delivered a trailing four-quarter earnings surprise of 4.9%, on average.  

Corning: New York-based Corning started out as a glass business that was reincorporated in 1936. The company has since developed its glass technologies to produce advanced glass substrates used in a wide range of applications across various markets. Corning’s competitive strength lies in its focus on innovation.

The company has a long-term earnings growth expectation of 18.2% and delivered a trailing four-quarter earnings surprise of 4.7%, on average. Corning carries a Zacks Rank #2.

Banco Bilbao: Headquartered in Bilbao, Spain, Banco Bilbao provides retail banking, wholesale banking and asset management services primarily in Spain, Mexico, Turkey, the Rest of Europe, South America, the United States and Asia.

The company has a long-term earnings growth expectation of 6.9% and delivered a trailing four-quarter earnings surprise of 7.4%, on average. Banco Bilbao carries a Zacks Rank #2.

AppLovin: Headquartered in Palo Alto, CA, AppLovin offers a software-based platform for advertisers to enhance the marketing and monetization of their content in the United States and internationally. The company provides end-to-end software and AI solutions for businesses to reach, monetize and grow their global audiences.

AppLovin has a long-term earnings growth expectation of 20% and delivered a trailing four-quarter earnings surprise of 22.4%, on average. AppLovin 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.

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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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