5 Stocks With High ROE to Buy as Markets Appear Topsy-Turvy

Investing

Published: August 24, 2023 8:55 am

Last Updated: August 24, 2023 11:56 am

The U.S. equity markets are witnessing intense volatility as a relatively modest start to the week was apparently negated by concerns that more interest rate hikes are around the corner. The downtrend was further triggered by the rising 10-year Treasury yield, which hit its highest level since 2007 on Monday, reaching 4.35%, before settling at 4.21% yesterday. This restored the equity markets’ growth momentum as investors awaited the latest quarterly results of technology behemoth Nvidia.

Despite signs of a resilient economy, with the personal consumption expenditures price index rising 2.6% in the second quarter, moderating inflation and solid corporate earnings, markets appear to be under “constructive rotation.” However, investors have broadly taken the decline in stride as fundamental views about the economy, in general, remain relatively strong.

The focus has now shifted to the Fed’s Sep 19-20 policy meeting. This will likely be another market catalyst, with investors looking for cues about the broader economy and the trajectory of future interest rate hikes.

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 like return on equity (ROE). A high ROE ensures that the company is reinvesting cash at a high rate of return. ON Semiconductor Corporation ON, Suzano S.A. SUZ, Ryder System, Inc. R, Upbound Group, Inc. UPBD and América Móvil, S.A.B. de C.V. AMX 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 16 stocks that qualified the screening:

ON Semiconductor: Phoenix, AZ-based onsemi is an original equipment manufacturer of a broad range of discrete and embedded semiconductor components. The company has a very well-diversified business. onsemi generates a significant percentage of revenues from each of the computing, consumer, industrial, communications and automotive markets.

The stock has a long-term earnings growth expectation of 7.5% and delivered a trailing four-quarter earnings surprise of 8.7%, on average. onsemi carries a Zacks Rank #2.

Suzano: Headquartered in Salvador, Brazil, Suzano produces and sells eucalyptus pulp and paper products. With more than 90 years of experience, this vertically integrated firm is one of the largest producers of paper and graphic products in South America.

Suzano has a long-term earnings growth expectation of 6.9% and delivered a trailing four-quarter earnings surprise of 10.4%, on average. It has a VGM Score of A. It carries a Zacks Rank #2.

Ryder: Florida-based Ryder is recognized as one of the world’s largest providers of integrated logistics and transportation solutions. Ryder’s customers range from small businesses to large international enterprises. They are drawn from a wide variety of industries, the most significant of which are automotive, electronics, transportation, grocery, lumber and wood products, food service and home furnishing.

Ryder sports a Zacks Rank #1. It delivered a trailing four-quarter earnings surprise of 11.2%, on average. It has a VGM Score of A.

Upbound Group: Headquartered in Plano, TX, Upbound Group (formerly Rent-A-Center, Inc.) is a leading lease-to-own provider with operations in the United States, Puerto Rico and Mexico. The company provides services to a large portion of consumers by providing them access and the opportunity to obtain ownership of high-quality, durable products under a flexible lease purchase agreement with no long-term debt obligation.

The company delivered a trailing four-quarter earnings surprise of 25.8%, on average. It has a VGM Score of B. Upbound Group sports a Zacks Rank #1.

América Móvil: Based in Mexico City, America Movil is the leading provider of integrated telecommunications services in Latin America. It offers enhanced communication solutions in 25 countries in Latin America, the United States and Central and Eastern Europe.

The company has a long-term earnings growth expectation of 7.9% and delivered a trailing four-quarter earnings surprise of 15.3%, on average. America Movil carries a Zacks Rank #2. It has a VGM Score of A.
America Movil, S.A.B. de C.V. Unsponsored ADR (AMX): Free Stock Analysis Report