Buy 5 Stocks With High ROE as Markets Wobble on AI Growth Concerns

The broader equity markets witnessed intense volatility over the past few days as a solid quarterly performance by some blue-chip tech firms was more than offset by concerns related to the increasing valuation of AI firms. Industry experts widely expect that growth in AI firms will not be commensurate with hefty investments, leading to a market correction in the near term. To add to the woes, the U.S. government shutdown entered a record 38th day. It weighed on investor sentiments as uncertainty over the resumption of normal federal operations dragged the shares and compounded market volatility.  

Moreover, the U.S. economy appeared a bit shaky with 153,000 job cuts in October – the highest for the month in 22 years – raising concerns about the labor market conditions. 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. TE Connectivity plc TEL, ZTO Express (Cayman) Inc. ZTO, Corning Incorporated GLW, Banco Bilbao Vizcaya Argentaria, S.A. BBVA and VICI Properties Inc. VICI 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 assets, 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 nine stocks that qualified the screening:

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. 

The company has a long-term earnings growth expectation of 10.7% and delivered a trailing four-quarter earnings surprise of 6.5%, on average. It has a VGM Score of B.  TE Connectivity carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here. 

ZTO Express: Founded in 2009, ZTO Express is a leading player in the field of express delivery in China. This Shanghai-based company went public in 2016. ZTO Express, along with its network partners, provides domestic and international express delivery services. The offerings are supplemented by other value-added services. In China, it mainly focuses on offering express deliveries of parcels, which mostly weigh below 50 kilograms. The expected delivery time ranges from 24 to 72 hours.

ZTO Express carries a Zacks Rank #2. The company has a long-term earnings growth expectation of 1.7%. 

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 4.1%, on average. Corning sports a Zacks Rank #1.

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 12% and delivered a trailing four-quarter earnings surprise of 5.7%, on average. Banco Bilbao carries a Zacks Rank #2.

VICI Properties: New York-based VICI Properties is an experiential real estate investment trust (REIT) engaged in the business of owning and acquiring gaming, hospitality and entertainment destinations. The geographically diverse portfolio comprises approximately 127 million square feet of space, encompassing around 60,300 hotel rooms and more than 500 restaurants, bars, nightclubs and sportsbooks. 

VICI properties has a long-term earnings growth expectation of 4.2% and delivered a trailing four-quarter earnings surprise of 0.4%, on average. Vici Properties carries a Zacks Rank #2.

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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