5 High ROE Stocks to Buy as Markets Face Tariff Bloodbath

The broader equity markets witnessed a bloodbath last Friday as the tariff war went full throttle, with China imposing a tit-for-tat 34% tariff after President Trump announced a 34% tax on imports from Beijing. With several European leaders mulling retaliatory tariffs, markets recoiled at the likely fallout of the developments as conservative investors went on a selling spree to stem the losses. Instead of a flurry of negotiations that could have led to satisfactory deals from all sides for a healthier change in the trajectory of global trade, the tariff war led to economic, market and geopolitical mayhem. 

This, in turn, faded hopes that the imposition of tariffs would help in reshoring American jobs and transforming the United States from being dependent on cheap imports to a production-focused economy. 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, Corning Incorporated GLW, Jazz Pharmaceuticals plc JAZZ, The AES Corporation (AES) and Pilgrim's Pride Corporation PPC 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 14 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 10/25/40/50/100 Gigabit Ethernet switches and routers optimized for next-generation data center networks. Arista uses multiple silicon architectures across its products.

It has a long-term earnings growth expectation of 14.4% and delivered a trailing four-quarter earnings surprise of 12.9%, on average. It has a VGM Score of B. Arista carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here. 

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 that are used in a large number of applications across multiple markets. Corning’s competitive strength lies in its focus on innovation.

The company has a long-term earnings growth expectation of 16.6% and delivered a trailing four-quarter earnings surprise of 3.3%, on average. It has a VGM Score of B. Corning carries a Zacks Rank #2. 

Jazz Pharmaceuticals: Dublin, Ireland-based Jazz Pharmaceuticals is a specialty biopharmaceutical company with a focus on neuroscience and oncology. The company derives most of its revenues from its sleep disorder drugs — Xywav and Xyrem.

It has a long-term earnings growth expectation of 7.3% and delivered a trailing four-quarter earnings surprise of 3.2%, on average. It has a VGM Score of B. Jazz Pharmaceuticals carries a Zacks Rank #2.

AES: Arlington, VA-based AES, incorporated in 1981, is a global power company. The company’s businesses are spread across four continents in 14 countries. AES has four Strategic Business Units (SBUs) located in the United States and other regions across the globe.

The company has a long-term earnings growth expectation of 3.3% and delivered a trailing four-quarter earnings surprise of 34.7%, on average. AES carries a Zacks Rank #2.

Pilgrim's Pride: Greeley, CO-based Pilgrim's Pride is engaged in the processing, production, marketing and distribution of frozen, fresh and value-added chicken products. The company offers its services in the United States, Mexico, France, the Netherlands, Puerto Rico and Mexico through several distributors, retailers and food service operators. 

The company delivered a trailing four-quarter earnings surprise of 25.7%, on average. It has a VGM Score of A. Pilgrim's Pride 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.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research