Buy 5 High ROE Stocks as Markets Break Tariff-Induced Losing Streak

The broader equity markets snapped a losing streak with a sharp uptrend yesterday on cues from Treasury Secretary Scott Bessent that the “de-escalation” of the tariff war with China will likely take shape sooner rather than later, as the current scenario was deemed “unsustainable.” This seemed to ease the frayed investor nerves, as markets interpreted the signal on a positive note with rising expectations of negotiations that could lead to satisfactory deals from all sides for a healthier change in the trajectory of global trade.

In the aftermath of the tariff bloodbath, the earnings season has gotten off to a shaky start with all eyes glued on how companies guide for the forthcoming quarters to minimize the adverse economic and geopolitical impacts. 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. Cboe Global Markets, Inc. CBOE, AGNC Investment Corp. AGNC, Jazz Pharmaceuticals plc JAZZ, The AES Corporation AES and Constellation Software Inc. CNSWF 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 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 15 stocks that qualified the screening:

Cboe Global: Based in Chicago, IL, and founded in 1973, Cboe Global is one of the largest stock exchange operators by volume in the United States and a leading market globally for ETP trading. Cboe Global offers trading across a diverse range of products in multiple asset classes.

It has a long-term earnings growth expectation of 9.7% and delivered a trailing four-quarter earnings surprise of 1.8%, on average. Cboe Global carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here. 

AGNC Investment: Headquartered in Bethesda, MD, AGNC Investment is a real estate investment trust that focuses on leveraged investments in Agency residential mortgage-backed securities. These include residential mortgage pass-through securities and collateralized mortgage obligations. 

AGNC Investment purchases single-family residential pass-through securities, which are interests in pooled loans of principal and interest, including pre-paid principal that are made to the holders of the notes. AGNC Investment 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 A. 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 sports a Zacks Rank #1.

Constellation Software: Headquartered in Toronto, Canada, Constellation Software acquires, builds and manages vertical market software businesses to develop mission-critical software solutions for public and private sector markets. Constellation Software also offers professional services comprising implementation services, custom programming, product training, consulting, hosted software-as-a-service products and other recurring services. 

The company delivered a trailing four-quarter earnings surprise of 3.6%, on average. It has a VGM Score of B. Constellation Software 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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