Published on 28 May 2024 on Zacks via Yahoo Finance

5 Stocks With High ROE to Profit as Markets Sway Whimsically

Over the past couple of trading days, the broader U.S. equity markets swayed wildly, registering the worst day of 2024 to recovering sharply to record-high tallies on the following day.The markets seemed to backtrack as the minutes of the Federal Reserve’s May policy meeting reignited fears that the central bank might not cut interest rates in the near future. The minutes revealed that several Fed officials are of the view that although inflation has eased over the past year, it is yet to achieve the benchmark 2% level. Consequently, there is an increasing willingness to resort to stricter policy measures if inflation fails to move toward the coveted goal.However, solid quarterly earnings by chipmaker Nvidia and the consequent bullish sentiment on the AI behemoth that boasts a market cap of more than $2.5 trillion led to a spirited turnaround by the markets. With investors betting big on the AI boom on solid demand trends, the markets scripted a remarkable uptrend to wipe off the loss and move into record-high territories.The upward trajectory was also buoyed by the optimism regarding a probable interest rate cut by the Federal Reserve in the near future. With weaker-than-expected job growth per the April nonfarm payrolls report and moderating wage gains, investors are pricing in a second rate cut by the end of the year with a nearly 50% likelihood of a 25-basis point rate cut in September.Recent data from S&P Global further revealed that U.S. Manufacturing PMI rose from 50.0 in April to 50.9 in May, portraying modest improvement in overall business conditions within the goods-producing sector. The headline S&P Global Flash U.S. PMI Composite Output Index rose sharply from 51.3 in April to 54.4 in May, implying healthy growth midway through the second quarter after a slowdown in March and April.  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. Reliance, Inc. RS, Suzano S.A. SUZ, PulteGroup, Inc. PHM, Alphabet Inc. GOOGL and Banco de Chile BCH are some of the stocks with high ROE to profit from.

Why ROE?

ROE = Net Income/Shareholders’ EquityROE 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.