Top 3 ROE Stocks to Profit as Earnings Season Heats Up

Supriyo Bose

The U.S. equity markets are widely anticipated to trade near all-time highs with expectations of solid quarterly results across the board as the earnings season gets heated up. With the Sino-U.S. trade relations nearing a historic deal to ease the tensions related to tariff war, the overall sentiments appear bullish. However, a slowdown in China is likely to be a dampener of sorts, hindering the smooth sail of the equity markets in general.

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, singling out cash-rich stocks alone do not make for a solid investment proposition unless these are backed by attractive efficiency ratios, like return on equity (ROE).  A high ROE ensures that the company is reinvesting its cash at a high rate of return.

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 stocks 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 three stocks that qualified the screen:

Mallinckrodt plc MNK: Based in Staines-Upon-Thames, the United Kingdom, Mallinckrodt manufactures and distributes specialty pharmaceutical products and therapies across the globe.  This Zacks #2 Ranked company delivered a trailing four-quarter average positive earnings surprise of 15.6%. It has a long-term earnings growth projection of 9%.

Sony Corporation SNE: Headquartered in Tokyo, Japan, Sony designs, manufactures and sells several consumer and industrial electronic equipment. The company’s product roster comprises audio and video equipment, televisions, displays, semiconductors, electronic components, gaming consoles, computers and computer peripherals and telecommunication equipment. The company has a long-term earnings growth projection of 7.7%. It delivered a trailing four-quarter average positive earnings surprise of 87.7%. Currently, it has a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Public Storage PSA: Headquartered in Glendale, CA, Public Storage is a leading self-storage real estate investment trust in the United States. The company acquires, develops, owns and operates self-storage facilities, generally on a month-to-month basis for business and personal use. This Zacks #2 Ranked firm delivered a trailing four-quarter average positive earnings surprise of 0.5%. It has a long-term earnings growth projection of 4%.

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.

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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.


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Sony Corporation (SNE) : Free Stock Analysis Report
 
Mallinckrodt public limited company (MNK) : Free Stock Analysis Report
 
Public Storage (PSA) : Free Stock Analysis Report
 
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