Buy 5 High ROE Stocks as Middle East Tensions Spark Oil Crisis

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Just when it appeared that the broader U.S. equity markets were cruising on a smooth sail buoyed by a solid economy, the escalating geopolitical tensions in the Middle East have doused investor enthusiasm. Stocks tumbled across the board as Iran fired ballistic missiles at Israel to avenge the death of Hezbollah leader Hassan Nasrallah and an Iranian commander in Lebanon.  

With Israel launching a counter-offensive strike against Lebanon, markets remained on the tenterhooks as the energy crisis began to soar. Crude oil prices have surged on the market uncertainty as traders brace for more volatility slugfest.

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. Lockheed Martin Corporation LMT, CF Industries Holdings, Inc. CF, Arch Capital Group Ltd. ACGL, PulteGroup, Inc. PHM and Banco de Chile BCH are some of the stocks with high ROE to profit from.

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 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.

Parameters Used for Screening

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 nine stocks that qualified the screening:

Lockheed Martin: Based in Bethesda, MD, Lockheed Martin is the largest defense contractor in the world. Its main areas of focus are defense, space, intelligence, homeland security and information technology, including cyber security. Lockheed Martin currently operates through four businesses — Aeronautics, Missiles and Fire Control, Rotary and Missions Systems and Space Systems.  

The company has a long-term earnings growth expectation of 4.7% and delivered a trailing four-quarter earnings surprise of 7.5%, on average. Lockheed Martin carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here

CF Industries: Headquartered in Deerfield, IL, CF Industries is one of the largest manufacturers and distributors of nitrogenous fertilizer and other nitrogen products globally. The company’s principal nitrogenous fertilizer products are ammonia, granular urea, urea ammonium nitrate solution and ammonium nitrate. The company operates two of the largest fertilizer complexes in North America, one in Donaldsonville, Louisiana, United States and the other in Medicine Hat, Alberta, Canada.

It has a long-term earnings growth expectation of 6%. CF Industries carries a Zacks Rank #2.

Arch Capital: Headquartered in Pembroke, Bermuda, Arch Capital offers insurance, reinsurance and mortgage insurance across the world. It provides a wide range of products and services, which include primary and excess casualty coverages, professional indemnity, workers’ compensation and umbrella liability and employers’ liability insurance coverages. The company offers a full range of property, casualty and mortgage insurance and reinsurance lines while maintaining a focus on writing specialty lines of insurance and reinsurance.

It has a long-term earnings growth expectation of 6.1% and delivered a trailing four-quarter earnings surprise of 28.9%, on average. It has a VGM Score of B. Arch Capital carries a Zacks Rank #2. 

PulteGroup: Based in Atlanta, GA, PulteGroup engages in homebuilding and financial services businesses, primarily in the United States. The company conducts operations through two primary business segments – Homebuilding and Financial Services. The company engages in maintaining a 50/50 balance between build-to-order and spec sales, enabling it to meet immediate demand with spec homes while accommodating buyers who prefer to customize their homes with build-to-order options.

The company has a long-term earnings growth expectation of 19% and delivered a trailing four-quarter earnings surprise of 10%, on average. It has a VGM Score of B. PulteGroup carries a Zacks Rank #2. 

Banco de Chile: Headquartered in Santiago, Chile, Banco de Chile provides various banking services to customers in the Latin American country. These include deposit accounts, loans, payment-related cards and insurance solutions. The company also offers services such as cash management, treasury, financial advisory, trade finance, leasing, factoring, payment, payroll, collection, mutual fund management, securities brokerage, currency trading, investment management, collection, securitization and capital markets services.

It delivered a trailing four-quarter earnings surprise of 6.1%, on average. Banco de Chile 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: https://www.zacks.com/performance.

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