5 Stocks With High ROE to Buy as Markets Bask in Economic Strength

The broader equity markets shrugged off President Trump’s incessant tariff threats and refused to wilt, trading in record territory over the past few days, primarily driven by a tech rally. Several blue-chip tech firms recorded solid gains buoyed by an encouraging start to the earnings season and massive strides in AI monetization. The uptrend was also buoyed by the Fed’s decision to keep interest rates unchanged at a target range of 3.5% to 3.75%, backed by economic strength and relatively modest job market conditions. With the unemployment rate showing signs of stabilization and inflation remaining at slightly elevated levels, investors expect interest rates to hold fort till May. 

However, latent tensions related to tariffs remained potent threats to the growth momentum. 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, Banco Bilbao Vizcaya Argentaria, S.A. BBVA, The TJX Companies, Inc. TJX and TE Connectivity plc TEL are some of the stocks with high ROE to profit from.

Why ROE?

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.

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 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 17 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 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 20.1%. It delivered a trailing four-quarter earnings surprise of 10.2%, on average. 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 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 18.8%. It delivered a trailing four-quarter earnings surprise of 4.4%, 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 12%. It delivered a trailing four-quarter earnings surprise of 5.7%, on average. Banco Bilbao sports a Zacks Rank #1. It has a VGM Score of B.  

TJX: Based in Framingham, MA, The TJX Companies is a leading off-price retailer of apparel and home fashions in the United States and worldwide. The company’s broad range of assortments at varying prices helps it to reach out to a wide range of consumers. The company has been able to distinguish itself from traditional retailers on the grounds of opportunistic buying strategies and a flexible business model.

The company has a long-term earnings growth expectation of 10.2%. It delivered a trailing four-quarter earnings surprise of 5.5%, on average. TJX carries a Zacks Rank #2. 

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 12%. It delivered a trailing four-quarter earnings surprise of 7.5%, on average. It has a VGM Score of A. TE Connectivity sports a Zacks Rank #1.

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

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