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Top 5 Stocks With High ROE to Buy as Markets Show Resilience

The U.S. equity markets showed immense resilience by breaking a four-day losing streak and returning to the growth trajectory last Friday, courtesy of a rebound in the regional banking sector and a strong earnings performance by Apple. The markets have been mostly on tenterhooks as investors remained worried about another financial banking crisis after the collapse of two other mid-sized banks, namely Silicon Valley Bank and Signature Bank. Although JPMorgan Chase acquired First Republic Bank to avert a similar banking catastrophe, the market sentiments largely trended down.

However, the shares of regional banks shrugged off the pessimism and witnessed an uptrend to buoy the overall market swing. In addition, strong iPhone sales and key inroads in India and other emerging markets helped Apple to record solid quarterly earnings results. The latest data from Labor Department's job report further revealed that non-farm payrolls increased by 253,000 in April compared with broad-based expectations of a rise of 180,000. Wages increased 4.4% year over year in April after climbing 4.3% in March, while the unemployment rate fell to 3.4%.

With improving job market conditions and softening inflationary pressures, investors largely expect the Fed to hold the interest rates in the near term. Moreover, the Fed indicated earlier that there might be just another hike in the current year depending on the macroeconomic factors, as tightening credit conditions could put pressure on the economy.

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. Marriott International, Inc. MAR, DICK'S Sporting Goods, Inc. DKS, D.R. Horton, Inc. DHI, ON Semiconductor Corporation ON and Triton International Limited TRTN 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 12 stocks that qualified the screen:

Marriott: Headquartered in Bethesda, MD, Marriott is a leading worldwide hospitality company focused on lodging management and franchising. As of year-end 2022, the company's portfolio encompassed nearly 8,300 properties under 30 leading brands spanning 138 countries and territories.

It has a long-term earnings growth expectation of 29.9% and delivered a trailing four-quarter earnings surprise of 8%, on average. It has a VGM Score of B. Currently, Marriott sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

DICK'S Sporting: Founded in 1948 in New York, DICK’S Sporting operates as a major omni-channel sporting goods retailer, offering athletic shoes, apparel, accessories and a broad selection of outdoor and athletic equipment for team sports, fitness, camping, fishing, tennis, golf, water sports, etc. It owns Golf Galaxy and Field & Stream stores, as well as Team Sports HQ. DICK’S Sporting also operates all-in-one youth sports digital platform.  

The company has a long-term earnings growth expectation of 5.4% and delivered a trailing four-quarter earnings surprise of 10%, on average. It has a VGM Score of B.  DICK’S Sporting carries a Zacks Rank #2.

D.R. Horton: Based in Texas, D.R. Horton is one of the leading national homebuilders, primarily engaged in the construction and sale of single-family houses both in the entry-level and move-up markets. Its operations are spread across 110 markets in 33 states in the East, Midwest, Southeast, South Central, Southwest and West regions of the United States.

The company has a long-term earnings growth expectation of 15.5% and delivered a trailing four-quarter earnings surprise of 15.3%, on average. D.R. Horton sports a Zacks Rank #1.

ON Semiconductor: Headquartered in Scottsdale, AZ, onsemi, is an original equipment manufacturer of a broad range of discrete and embedded semiconductor components. The company was spun off from Motorola in August 1999 and went public through an IPO in May 2000. It offers a highly differentiated and innovative product portfolio, delivering intelligent power and sensing technologies that solve the world’s most complex challenges for a safer, cleaner and smarter world.

The company has a long-term earnings growth expectation of 3.7% and delivered a trailing four-quarter earnings surprise of 15.3%, on average. It has a VGM Score of B. onsemi carries a Zacks Rank #2.

Triton: Based in Hamilton, Bermuda, Triton is the largest lessor of intermodal containers (large steel boxes used for transporting freight by ship/rail/truck). The company also focuses on leasing chassis, which are used for transporting containers. It offers leasing services through 19 offices and three independent offices located in 16 countries.

The company delivered a trailing four-quarter earnings surprise of 6.3%, on average. Triton 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:

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Marriott International, Inc. (MAR) : Free Stock Analysis Report

DICK'S Sporting Goods, Inc. (DKS) : Free Stock Analysis Report

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Triton International Limited (TRTN) : Free Stock Analysis Report

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