5 High ROE Stocks to Buy as Markets Tumble on Soaring Bond Yields

The broader equity markets witnessed a downtrend over the past few trading days as bond yields soared to the highest levels since October 2023 on concerns regarding the burgeoning U.S. deficit. With the new budget bill moving to the Senate for approval, it is likely to increase the U.S. government’s debt by trillions. Although the bill is expected to reduce taxes, increase spending (especially on defense) and stimulate the economy to boost GDP growth, it is likely to add to the deficit in the longer term as the Treasury notes become increasingly less appealing and trustworthy.

In the aftermath of the tariff bloodbath, markets remained edgy with President Trump proposing stiffer duties on the European Union from next month. 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. The Walt Disney Company DIS, AGNC Investment Corp. AGNC, Arista Networks Inc. ANET, AutoZone, Inc. AZO and AppLovin Corporation APP 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 10 stocks that qualified the screening:

Walt Disney: Burbank, CA-based Walt Disney has assets that span movies, television shows and theme parks. This leading diversified international family entertainment and media enterprise operates through three business segments — Entertainment, Sports and Experiences.

The company has a long-term earnings growth expectation of 11.8% and delivered a trailing four-quarter earnings surprise of 16.4%, on average. It has a VGM Score of A. Walt Disney 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. 

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 14.8% and delivered a trailing four-quarter earnings surprise of 11.8%, on average. Arista carries a Zacks Rank #2.

AutoZone: Headquartered in Memphis, TN, AutoZone is one of the leading specialty retailers and distributors of automotive replacement parts and accessories in the United States. The company operates in the Do-It-Yourself (DIY) retail, Do-It-for-Me (DIFM) auto parts and products markets. Each of its retail stores offers wide-ranging products for cars, sport utility vehicles, vans and light trucks, including new and remanufactured automotive hard parts, maintenance items, accessories and non-automotive products.

The company has a long-term earnings growth expectation of 11.8%. AutoZone carries a Zacks Rank #2.

AppLovin: Headquartered in Palo Alto, CA, AppLovin offers a software-based platform for advertisers to enhance the marketing and monetization of their content in the United States and internationally. The company provides end-to-end software and AI solutions for businesses to reach, monetize and grow their global audiences.

The company has a long-term earnings growth expectation of 20% and delivered a trailing four-quarter earnings surprise of 22.9%, on average. AppLovin 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.

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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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