5 Best ROE Stocks To Beat Earnings Blues
This earnings season is turning out to be not as bad as initially expected. Still, the earnings recession is likely to continue in Q1 with the S&P 500 expected to record its fourth successive quarterly decline in earnings. No matter the market reaction, it’s always safer to bet on “cash cow” stocks – which as the name implies can be easily milked for more cash or profits with little expense involved.
These cash-rich stocks are usually mature companies with steady operations and require comparatively less capital investments than other players in the market. Consequently, these stocks are able to generate more free cash to boost shareholder returns. However, liquidity strength alone does not make cash-rich stocks a solid investment proposition, unless they are backed by attractive efficiency ratios like return on equity (ROE). A high ROE ensures whether a company is reinvesting its cash at a high rate of return.
ROE: A Game-Changing Financial Metric
ROE = Net Income/Shareholders’ Equity
ROE separates the wheat from the chaff and helps investors distinguish between profit-generating companies from profit burners. In other words, this financial metric enables investors to identify those stocks that diligently deploy cash for higher investor returns instead of piling up the dry powder.
Furthermore, 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 growing its profits without investing any new equity capital in the business and portrays management efficiency in rewarding shareholders with attractive risk-adjusted returns.
The Winning Strategy
In order to shortlist stocks that are cash rich with high ROE, we added Cash Flow greater than $1 billion and ROE greater than X-Industry as our primary screening parameters. However, ROE is not an absolute indicator for short listing stocks in a turbulent market. As such, we have added a few additional criteria to arrive at a winning strategy.
Price/Cash Flow less than X-Industry:This metric measures how much investors pay for one dollar 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 its assets, which include cash, accounts receivable, property, equipment, inventory and furniture. Of course, the higher the ROA, the better it is.
5 Year EPS Historical Growth greater than X-Industry:This criterion indicates that continued earnings momentum has translated to 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 5 of the 16 stocks that qualified the screening:
Broadcom Limited (AVGO - Analyst Report)
Kellogg Company (K - Analyst Report)
Altria Group Inc. (MO - Analyst Report)
Gilead Sciences Inc. (GILD - Analyst Report)
Braskem S.A. (BAK - Snapshot Report)
With an enviable cash pile, these stocks appear to be enterprising picks amid this Q1 earnings conundrum, when they are blended with other attractive features like high ROE, high ROA and solid historical earnings growth along with a solid Zacks Rank.
Disclosure: Zacks.com contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or ...
more