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5 ROE Stocks to Buy as Q4 Earnings Witness Shaky Start

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After a solid start to the year, U.S. equity markets appeared to rescind the growth trajectory with disappointing earnings results from hitherto reported companies within the banking sector. The financial bigwigs usually act as a precursor to the overall earnings season and set the tone for the broader market sentiments. Moreover, soaring inflationary pressures, decline in December retail sales and mounting coronavirus infections from the Omicron variant continue to weigh on the markets. However, the markets regained some lost ground as the Fed chief aimed to soothe frayed investor nerves by dispelling fears that the central bank will be overly aggressive in reducing its massive balance sheet.

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. CommScope Holding Company, Inc. COMM, Microchip Technology Incorporated MCHP, Regeneron Pharmaceuticals, Inc. REGN, Bunge Limited BG and Hologic, Inc. HOLX are some of the stocks with high ROE to profit.

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.

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 20 stocks that qualified the screen:

CommScope Holding Company, Inc.: Headquartered in Hickory, NC, CommScope is a premier provider of infrastructure solutions, including wireless and fiber optic solutions, for the core, access and edge layers of communication networks. The company has a long-term earnings growth expectation of 21.6%.

CommScope delivered a trailing four-quarter earnings surprise of 4.4%, on average. It sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Microchip Technology Incorporated: Chandler, AZ-based Microchip develops and manufactures microcontrollers, memory and analog and interface products for embedded control systems, which are small, low-power computers designed to perform specific tasks.

The company delivered a trailing four-quarter earnings surprise of 3.5%, on average, and has a long-term earnings growth expectation of 19.1%. Microchip carries a Zacks Rank #2.

Regeneron Pharmaceuticals, Inc.: Tarrytown, NY-based Regeneron is a biotechnology company focused on the discovery, development and commercialization of treatments targeting serious medical conditions. The company delivered a trailing four-quarter earnings surprise of 28.9%, on average.

Regeneron carries a Zacks Rank #2. The stock has a long-term earnings growth expectation of 13%.

Bunge Limited: Headquartered in St. Louis, MO, Bunge operates as an agribusiness firm, delivering essential food, feed and fuel across the globe. The company is reportedly the world’s leader in oilseed processing and a leading producer and supplier of specialty plant-based oils and fats.

Bunge delivered a trailing four-quarter earnings surprise of 105.7%, on average. This Zacks Rank #1 stock has a long-term earnings growth expectation of 6.7%.

Hologic, Inc.: Headquartered in Bedford, MA, Hologic develops, manufactures and supplies diagnostics, medical imaging systems and surgical products which cater to the healthcare needs of women.

The company delivered a trailing four-quarter earnings surprise of 29.2%, on average, and has a long-term earnings growth expectation of 7.4%. Hologic 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
 
Regeneron Pharmaceuticals, Inc. (REGN) : Free Stock Analysis Report
 
Hologic, Inc. (HOLX) : Free Stock Analysis Report
 
Microchip Technology Incorporated (MCHP) : Free Stock Analysis Report
 
Bunge Limited (BG) : Free Stock Analysis Report
 
CommScope Holding Company, Inc. (COMM) : Free Stock Analysis Report
 
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