Cash Cows: 5 High-ROE Stocks to Benefit from Market Volatility
The broader U.S. equity markets have shown a modest upward trend over the past few trading days, fueled by optimism around potential interest rate cuts due to easing inflationary pressures and robust economic indicators. This sentiment has been further bolstered by solid earnings reports from several companies, raising hopes for a possible rate cut as early as September. As the market waits for the Federal Reserve’s monetary policy update, investors are looking for cues about potential future rate cuts while employing a “wait-and-see” approach. This fluctuating market environment presents an opportunity to benefit from “cash cow” stocks – those that generate substantial returns. However, identifying cash-rich companies alone is not sufficient for a strong investment proposition; it needs to be coupled with attractive efficiency ratios like Return on Equity (ROE). A high ROE indicates that a company is effectively reinvesting its cash for higher returns, making it more attractive to investors. Best Buy Co., Inc. (BBY), The AES Corporation (AES), Lockheed Martin Corporation (LMT), PulteGroup, Inc. (PHM), and Banco de Chile (BCH) are among the stocks with high ROE that investors can consider profiting from.
Key Takeaways:
- The stock market is experiencing a period of uncertainty as investors await the Federal Reserve’s monetary policy update.
- Cash cow stocks with high ROE offer a potential solution for navigating volatility and generating consistent returns.
- ROE is a key financial metric that measures a company’s profitability by comparing net income to shareholder equity.
- 5 high-ROE stocks – Best Buy, AES, Lockheed Martin, PulteGroup, and Banco de Chile – present attractive investment opportunities in the current market environment.
Why Focus on ROE?
Understanding the Metric:
ROE is calculated by dividing Net Income by Shareholders’ Equity. ROE offers investors a clear picture of how effectively a company uses its assets to generate profit. A high ROE signifies that a company is proficiently employing its shareholders’ investments to generate substantial returns. Conversely, a low ROE may indicate that a company is struggling to make profitable use of its assets.
Importance of ROE:
ROE plays a crucial role for investors seeking profitable companies:
- Profitability Indicator: ROE helps investors differentiate between profitable companies and those that are struggling. It highlights companies efficiently deploying cash for higher returns.
- Comparing Companies: ROE is widely used to compare the profitability of companies within the same industry. A higher ROE generally indicates a more profitable and efficient company.
- Rewarding Shareholders: A high ROE showcases management’s effectiveness in rewarding shareholders with attractive risk-adjusted returns. It indicates that a company is efficiently utilizing its assets to generate profits without needing to inject new equity capital.
Selecting High-ROE Cash Cows: The Screening Process
To identify cash-rich stocks with high ROE, we implemented a multi-layered screening process, focusing on key financial metrics:
Primary Screening Parameters:
- Cash Flow Greater Than $1 Billion: This parameter ensures that the company generates substantial cash flow, a key indicator of financial strength.
- ROE Greater Than X-Industry: We screened for companies with ROE exceeding the industry average, highlighting firms that outperform their peers in profitability.
Secondary Screening Criteria:
- Price/Cash Flow Less Than X-Industry: A lower ratio indicates that investors are paying less for each dollar of free cash flow, suggesting a potentially undervalued opportunity.
- Return on Assets (ROA) Greater Than X-Industry: This parameter measures how efficiently a company utilizes its assets to generate profits. A higher ROA indicates that the company is generating more profit per dollar of assets.
- 5-Year EPS Historical Growth Greater Than X-Industry: This criterion points to companies with consistent earnings momentum, suggesting strong cash strength and a positive outlook for future growth.
- Zacks Rank Less Than or Equal to 2: The Zacks Rank system assigns a numerical rating to stocks based on earnings estimates and other factors. Companies with a Zacks Rank of 1 (Strong Buy) or 2 (Buy) are known to outperform the market, irrespective of market conditions.
This rigorous screening process yielded 14 candidate stocks, five of which stand out as particularly attractive opportunities:
Top 5 High-ROE Cash Cow Stocks:
1. Best Buy Co., Inc. (BBY):
- Headquarters: Richfield, MN
- Industry: Consumer Electronics Retail
- What They Do: Best Buy is a multinational specialty retailer of consumer electronics, home office products, appliances, and related services.
- Key Highlights: Best Buy enjoys a long-term earnings growth expectation of 5.1% and boasts a trailing four-quarter earnings surprise of 11%, on average. It also has a VGM Score of B and carries a Zacks Rank #2.
2. The AES Corporation (AES):
- Headquarters: Arlington, VA
- Industry: Power Generation
- What They Do: AES is a global power company with operations across four continents in 14 countries. They are a leader in the utility industry’s transition to clean energy.
- Key Highlights: AES delivered a trailing four-quarter earnings surprise of 13.8%, on average, and has a Zacks Rank #2. It also boasts a VGM Score of A.
3. Lockheed Martin Corporation (LMT):
- Headquarters: Bethesda, MD
- Industry: Aerospace and Defense
- What They Do: Lockheed Martin is the world’s largest defense contractor specializing in defense, space, intelligence, homeland security, and information technology, including cybersecurity.
- Key Highlights: Lockheed Martin has a long-term earnings growth expectation of 4.2% and boasts a trailing four-quarter earnings surprise of 7.5%, on average. It carries a Zacks Rank #2.
4. PulteGroup, Inc. (PHM):
- Headquarters: Atlanta, GA
- Industry: Homebuilding
- What They Do: PulteGroup is a leading homebuilder in the United States, operating through two primary business segments: Homebuilding and Financial Services.
- Key Highlights: PulteGroup has a long-term earnings growth expectation of 19% and a trailing four-quarter earnings surprise of 10%, on average. It holds a VGM Score of B and carries a Zacks Rank #2.
5. Banco de Chile (BCH):
- Headquarters: Santiago, Chile
- Industry: Banking
- What They Do: Banco de Chile offers a wide range of banking services to customers in Chile, including deposit accounts, loans, cards, insurance, and investment management.
- Key Highlights: Banco de Chile delivered a trailing four-quarter earnings surprise of 7.1%, on average, and carries a Zacks Rank #2.
Navigating Market Volatility With High-ROE Stocks:
While the current market environment presents uncertainty, investors can capitalize on opportunities for capital appreciation by focusing on cash cow stocks with strong ROE. These companies, strategically selected through a multi-layered screening process, are primed to navigate market fluctuations effectively. By focusing on fundamental financial strength and efficiency ratios, investors can potentially mitigate risks and maximize returns in this dynamic market.
- 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.
- Disclaimer: Benzinga does not provide investment advice. This article is for informational purposes only. All rights reserved.
