5 ROE stocks to buy as Q4 earnings show rocky start

After a strong start to the year, US stock markets appeared to be back on their growth trajectory with disappointing results for hitherto heralded banking sector companies. Financial bigwigs usually act as a precursor to the overall earnings season and set the tone for broader market sentiments. Additionally, soaring inflationary pressures, falling retail sales in December and rising Omicron variant coronavirus infections continue to weigh on markets. However, markets regained some lost ground as the Fed chief aimed to soothe frayed nerves among investors by allaying concerns that the central bank was too aggressive in shrinking its massive balance sheet.

While investors use a wait-and-see approach in a classic example of “support and fill” in the market, they can benefit from “cash cow” stocks that generate higher returns. However, identifying cash-rich stocks alone is not a strong investment proposition, unless it is backed by attractive efficiency ratios such as return on equity (ROE). A high ROE ensures that the company reinvests its cash at a high rate of return. CommScope Holding Company, Inc. COM, Embedded microchip technology MCHP, Regeneron Pharmaceuticals, Inc. REGN, Bunge Limited BG and Hologic, Inc. HOLX is one of the stocks with a high ROE to take advantage of.

ROE: a key measure

ROE = Net income/Equity

ROE helps investors distinguish profit-generating companies from profit-burners and is useful in determining a company’s financial health. In other words, this financial metric allows investors to identify companies that diligently deploy cash for higher returns.

Additionally, ROE is often used to compare a company’s profitability to that of other companies in the industry – the higher, the better. It measures how well a company multiplies its profits without investing new equity and depicts management’s effectiveness in rewarding shareholders with attractive risk-adjusted returns.

Parameters used for screening

In order to screen out cash-rich stocks with a high ROE, we added Cash flow over $1 billion and ROE higher than X-Industry as our main screening parameters. In addition, we took into consideration a few other criteria to arrive at a winning strategy.

Price/Cash Flow lower than X-Industry: This metric measures how much investors pay for $1 of free cash flow. A lower ratio indicates that investors should pay less for a stock that generates more cash flow.

Return on assets (ROA) higher than X-Industry: This measure determines the profit a business makes for every dollar of assets, which includes cash, accounts receivable, property, equipment, inventory, and furniture. The higher the ROA, the better for the business.

Historic EPS growth over 5 years higher than X-Industry: This metric indicates that continued earnings momentum has translated into strong cash.

Zacks rank less than or equal to 2: Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform regardless of the market environment.

Here are five of the 20 stocks that qualified the screen:

CommScope Holding Company, Inc.: Based in Hickory, NC, CommScope is a leading provider of infrastructure solutions, including wireless and fiber optic solutions, for the core, access and edge layers of communications networks. The company forecasts long-term earnings growth of 21.6%.

CommScope posted a four-quarter earnings surprise of 4.4% on average. He sports a Zacks rank #1. You can see the full list of today’s Zacks #1 Rank stocks here.

Embedded microchip technology: Microchip, based in Chandler, Arizona, develops and manufactures microcontrollers, memories, and analog and interface products for embedded control systems, which are small, low-power computers designed to perform specific tasks.

The company posted a four-quarter earnings surprise of 3.5% on average and expects long-term earnings growth of 19.1%. Microchip wears a Zacks Rank #2.

Regeneron Pharmaceuticals, Inc.: Based in Tarrytown, New York, Regeneron is a biotechnology company focused on the discovery, development and commercialization of treatments for serious medical conditions. The company has realized a surprise on earnings for the last four quarters of 28.9% on average.

Regeneron carries a Zacks rank of No. 2. The stock has a long-term earnings growth expectation of 13%.

Bungee limited: Based in St. Louis, MO, Bunge operates as an agribusiness company, supplying essential food, feed and fuel across the globe. The company is said to be the world’s leading oilseed processor and a leading producer and supplier of specialty vegetable oils and fats.

Bunge delivered a four-quarter earnings surprise of 105.7% on average. This Zacks Rank #1 stock has a long-term earnings growth expectation of 6.7%.

Hologic, Inc.: Based in Bedford, MA, Hologic develops, manufactures and supplies diagnostics, medical imaging systems and surgical products that meet the health needs of women.

The company posted a four-quarter earnings surprise of 29.2% on average and expects long-term earnings growth of 7.4%. Hologic wears a #2 Zacks rank.

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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 the options mentioned herein. An affiliated investment advisory firm may hold or have shorted securities and/or hold long and/or short positions in options mentioned herein.

Disclosure: Information on the performance of Zacks portfolios and strategies is available at: https://www.zacks.com/performance.

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Regeneron Pharmaceuticals, Inc. (REGN): Free Stock Analysis Report

Hologic, Inc. (HOLX): Free Stock Analysis Report

Microchip Technology Incorporated (MCHP): Free Stock Analysis Report

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CommScope Holding Company, Inc. (COMM): Free Inventory Analysis Report

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