5 High-ROE Picks as Solid Labor Market Conditions Propel Stocks

The broader equity markets witnessed a steady uptrend for the past three days, with better-than-expected nonfarm payroll data portraying a relatively healthy picture of the overall economy. Allaying fears of an economic slowdown, the U.S. payrolls climbed 139,000 in May, well above the broader expectations of 125,000 job additions for the month. The markets were also buoyed by the ongoing discussions between the top U.S.-China diplomats to iron out the differences for an amicable solution to trade tariffs. Markets now await further clarity on the possible impacts of the tariffs on the economy, with inflation data slated for release later this week.

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. VICI Properties Inc. VICI, SSAB AB SSAAY, Arista Networks Inc ANET, Banco Bilbao Vizcaya Argentaria, S.A. BBVA and AppLovin Corporation APP 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 eight stocks that qualified the screening:

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.

The company has a long-term earnings growth expectation of 4.6% and delivered a trailing four-quarter earnings surprise of 0.9%, on average. VICI Properties carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here. 

SSAB: Headquartered in Stockholm, Sweden, SSAB engages in the production and sale of steel products in Sweden, Finland, the Rest of Europe, the United States and internationally. It serves heavy transport, automotive, material handling, construction machinery, energy, construction, protection and tooling customers through its sales channels, service centers and distributors.

SSAB carries a Zacks Rank #2. It has a VGM Score of A. 

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.

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 5.3% and delivered a trailing four-quarter earnings surprise of 6.3%, on average. Banco Bilbao 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. It has a VGM Score of B. 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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This article originally published on Zacks Investment Research (zacks.com).

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