5 Stocks With High ROE to Buy as Markets Appear on Cruise Mode

The U.S. equity markets appear to have steadied after President Joe Biden signed the debt ceiling bill to avert a potential default on the federal government’s debt. A default would have made the government incapable of borrowing any more money or repaying its bills, endangering the global economy and affecting prices and mortgage rates in other countries. The markets were further propelled by a better-than-expected May jobs report that allayed the fears of recession from the near-term horizon to at least until 2024.

The jobs report revealed that payrolls in the public and private sectors increased by 339,000 in May, significantly higher than broad-based expectations of 190,000 rise. While professional and business services added 64,000 jobs, government and healthcare sectors contributed 56,000 and 52,000 job additions, respectively. Average hourly earnings, a key inflation indicator, improved 0.3% for the month and were in sync with expectations. The focus has now shifted to the Federal Reserve’s Jun 13-14 policy meeting, which is likely to be another potential market catalyst.

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. Marriott International, Inc. MAR, BorgWarner Inc. BWA, Atkore Inc. ATKR, Upbound Group, Inc. UPBD and Triton International Limited TRTN 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 screen:

Marriott: Headquartered in Bethesda, MD, Marriott is a leading worldwide hospitality company focused on lodging management and franchising. As of year-end 2022, the company’s portfolio encompassed nearly 8,300 properties under 30 leading brands spanning 138 countries and territories.

It has a long-term earnings growth expectation of 15.5% and delivered a trailing four-quarter earnings surprise of 8%, on average. Currently, Marriott carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

BorgWarner: Michigan-based BorgWarner is a global leader in clean and efficient technology solutions required for combustion, hybrid and electric vehicles. Its products include four-wheel-drive and all-wheel-drive transfer cases (primarily for light trucks and sport utility vehicles or SUVs), as well as automatic transmission and timing chain systems.

The company has a long-term earnings growth expectation of 14.1% and delivered a trailing four-quarter earnings surprise of 15.3%, on average. It has a VGM Score of A. BorgWarner carries a Zacks Rank #2.

Atkore: Headquartered in Harvey, IL, Atkore offers conduits, cables, and installation accessories in the United States and internationally. With a network of manufacturing and distribution facilities worldwide, Atkore is a leading provider of electrical, safety and infrastructure solutions.

Atkore carries a Zacks Rank #2. It delivered a trailing four-quarter earnings surprise of 16.3%, on average.

Upbound Group: Formerly known as Rent-A-Center, Inc., Upbound Group 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 with 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 16.1%, on average. It has a VGM Score of A. Upbound Group carries a Zacks Rank #2.

Triton: Based in Hamilton, Bermuda, Triton is the largest lessor of intermodal containers (large steel boxes used for transporting freight by ship/rail/truck). The company also focuses on leasing chassis, which are used for transporting containers. It offers leasing services through 19 offices and three independent offices in 16 countries.

The company delivered a trailing four-quarter earnings surprise of 6.3%, on average. Triton 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.

Click here to sign up for a free trial to the Research Wizard today.

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.

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