5 High ROE Stocks to Buy as Low Inflation Fuels Rate Cut Hopes

In this article:

The broader U.S. equity markets witnessed a steady uptrend over the past few trading days, buoyed by optimism related to rate cuts driven by easing inflationary pressures. The June consumer price index declined for the first time in more than four years by 0.1% from May, putting the 12-month rate at 3% – the lowest level in more than three years.

These ignited hopes of a possible rate cut as early as September. The optimism was further propelled by Federal Reserve Chair Jerome Powell’s latest views that keeping interest rates elevated for too long could risk economic growth. The subtle hint of a less-restrictive stance probably aided the uptrend. A healthy quarterly earnings performance from hitherto reported companies added to the stock market euphoria.

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. United Therapeutics Corporation UTHR, ABB Ltd ABBNY, Lockheed Martin Corporation LMT, MPLX LP MPLX and Banco de Chile BCH 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 nine stocks that qualified the screening:

United Therapeutics: Silver Spring, MD-based United Therapeutics markets four medicines in the United States to treat pulmonary arterial hypertension: Remodulin, an injectable formulation of treprostinil, Orenitram, an oral version of treprostinil, Tyvaso, an inhaled version of treprostinil, and Adcirca (tadalafil; also sold by Eli Lilly as Cialis for erectile dysfunction) tablets. The company is also focused on research and development efforts to address the shortage of transplantable organs and tissues through regenerative medicine and organ manufacturing.

It has a long-term earnings growth expectation of 9.2% and delivered a trailing four-quarter earnings surprise of 12.4%, on average. It has a VGM Score of A. United Therapeutics carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here

ABB: Headquartered in Zurich, Switzerland, ABB offers electrification, motion and automation products and solutions for diverse customers in utilities, transport and infrastructure sectors across the globe. The company’s solutions leverage engineering know-how and software to optimize operations and accelerate industrial transformation.

It has a long-term earnings growth expectation of 8.9%. ABB carries a Zacks Rank #2. 

Lockheed Martin: Based in Bethesda, MD, Lockheed Martin is the largest defense contractor in the world. Its main areas of focus are defense, space, intelligence, homeland security and information technology, including cyber security. Lockheed Martin currently operates through four businesses — Aeronautics, Missiles and Fire Control, Rotary and Missions Systems and Space Systems.  

The company has a long-term earnings growth expectation of 4.1% and delivered a trailing four-quarter earnings surprise of 6.1%, on average. It has a VGM Score of A.  Lockheed Martin carries a Zacks Rank #2.

MPLX: Findlay, OH-based MPLX LP is a master limited partnership engaged in providing a wide range of midstream energy services, including fuel distribution solutions. The large-cap partnership was created in 2012 to own, operate and develop midstream energy infrastructures and logistics assets, mostly for its parent company, Marathon Petroleum Corporation. Notably, Marathon Petroleum holds around 64% of MPLX's outstanding common units.

The company has a long-term earnings growth expectation of 5% and delivered a trailing four-quarter earnings surprise of 4.6%, on average. It has a VGM Score of B. MPLX carries a Zacks Rank #2. 

Banco de Chile: Headquartered in Santiago, Chile, Banco de Chile provides various banking services to customers in the Latin American country. These include deposit accounts, loans, payment-related cards and insurance solutions. The company also offers services such as cash management, treasury, financial advisory, trade finance, leasing, factoring, payment, payroll, collection, mutual fund management, securities brokerage, currency trading, investment management, collection, securitization and capital markets services.

It delivered a trailing four-quarter earnings surprise of 7.1%, on average. Banco de Chile 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

Lockheed Martin Corporation (LMT) : Free Stock Analysis Report

United Therapeutics Corporation (UTHR) : Free Stock Analysis Report

Banco De Chile (BCH) : Free Stock Analysis Report

MPLX LP (MPLX) : Free Stock Analysis Report

ABB Ltd (ABBNY) : Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research

Advertisement