5 Stocks With High ROE to Buy as Markets Flatter to Deceive Again

After a tumultuous last week that witnessed an intensified sell-off, the broader equity markets scripted a spirited comeback with a solid recovery by technology stocks. Blue-chip stocks like NVIDIA and Broadcom led the surge after investors had earlier gravitated away from riskier bets en masse on fears of AI disruption to other attractively valued sectors of the market. Bitcoin also made a rebound after stooping as low as $60,062.00, with investors taking a risk-off posture. 

However, latent threats to the finance sector from AI and weaker-than-expected retail sales data pushed the leading benchmark indices to the red, leading to intense market volatility. 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. Alcoa Corporation AA, Globe Life Inc. GL, 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.

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 12 stocks that qualified the screening:

Alcoa: Headquartered in Pittsburgh, PA, Alcoa engages in active mining of bauxite and other aluminous ores. It also generates electricity that is sold to large industrial consumers, distribution firms and other power generation companies. 

The company delivered a trailing four-quarter earnings surprise of 44.5%, on average. Alcoa sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here. 

Globe Life: Based in McKinney, TX, Globe Life is an insurance holding company for a group of insurance companies that primarily market individual life and supplemental health insurance to lower-middle to middle-income households throughout the United States. Globe Life's insurance subsidiaries write a variety of nonparticipating ordinary life insurance products, which include traditional whole life, term life and other life insurance. 

It also offers Medicare Supplement and limited-benefit supplemental health insurance products that include primarily critical illness and accident plans. Globe Life 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 3.2%, 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 basis 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 B. TE Connectivity sports a Zacks Rank #1. 

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