5 Stocks With High ROE to Bet on as Oil Price Volatility Hits Markets

After a tumultuous past week, the broader equity markets witnessed an uptrend yesterday as oil prices cooled with the U.S. administration allowing Iranian oil tankers to pass safely through the Strait of Hormuz. Oil prices had earlier surged to record highs as traffic in the critical shipping route had halted since the war between Iran and Israel, backed by the United States, began. As tensions escalated and spread into the neighboring countries, crude oil prices soared to as high as $120 a barrel, sending shockwaves throughout global bourses. This forced the International Energy Agency to release one of the largest oil reserves to stem the oil price volatility.

President Trump has vowed to form a coalition of countries to escort ships through the Strait to rein in oil prices, propelling the stock markets from the doom and gloom. 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, such as return on equity (ROE). A high ROE ensures that the company is reinvesting cash at a high rate of return. Ross Stores, Inc. ROST, Globe Life Inc. GL, Broadcom Inc. AVGO, Colgate-Palmolive Company CL and TE Connectivity plc TEL 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 assets, 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 11 stocks that qualified the screening:

Ross: Based in Dublin, CA, Ross is an off-price retailer of apparel and home accessories, offering in-season, branded and designer apparel, footwear, accessories and other home-related merchandise. Operating primarily in the United States, it targets middle-income households, keeping prices at generally 20% to 60% below the regular prices of most department and specialty stores.

The company has a long-term earnings growth expectation of 10% and delivered a trailing four-quarter earnings surprise of 6.2%, on average. Ross carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Globe Life: Based in McKinney, TX, Globe Life is a holding company for a group of insurance companies that primarily market individual life and supplemental health insurance to lower-middle to middle-income households throughout the United States. Globe Life's insurance subsidiaries write a variety of nonparticipating ordinary life insurance products, which include traditional whole life, term life and other life insurance.

It also offers Medicare Supplement and limited-benefit supplemental health insurance products that primarily include critical illness and accident plans. Globe Life carries a Zacks Rank #2.

Broadcom: Headquartered in San Jose, CA, Broadcom develops a broad range of semiconductor solutions for enterprise and data center networking and home connectivity. It also manufactures various semiconductor solutions for set-top boxes, telecommunication equipment, smartphones and base stations, as well as data center servers and storage systems, power generation and alternative energy systems, and electronic displays.

The company has a long-term earnings growth expectation of 48.6%. It delivered a trailing four-quarter earnings surprise of 1.9%, on average. Broadcom carries a Zacks Rank #2.

Colgate-Palmolive: New York City-based Colgate-Palmolive is a global leader in the oral care hygiene market. It produces and distributes household, healthcare and personal care products. The company sells its products in more than 200 countries around the world. Its business is tightly focused on four core categories — Oral Care, Personal Care, Pet Nutrition and Home Care.

The company has a long-term earnings growth expectation of 5.7%. It delivered a trailing four-quarter earnings surprise of 4%, on average. Colgate-Palmolive carries a Zacks Rank #2. It has a VGM Score of B.

TE Connectivity: Based in Galway, Ireland, TE Connectivity is a global technology company that designs and manufactures connectivity and sensor solutions for a wide range of industries, including automotive, aerospace, defense, energy and medical. With operations in more than 130 countries, TE Connectivity focuses on emerging technologies such as 5G, electric vehicles, industrial automation and smart cities to position itself at the forefront of connectivity advancements.

The company has a long-term earnings growth expectation of 12%. It delivered a trailing four-quarter earnings surprise of 7.5%, on average. It has a VGM Score of B. TE Connectivity carries a Zacks Rank #2.

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Colgate-Palmolive Company (CL): Free Stock Analysis Report

Ross Stores, Inc. (ROST): Free Stock Analysis Report

TE Connectivity Ltd. (TEL): Free Stock Analysis Report

Broadcom Inc. (AVGO): Free Stock Analysis Report

Globe Life Inc. (GL): Free Stock Analysis Report

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