Published on 1 Dec 2021 on Zacks via Yahoo Finance

5 High ROE Stocks to Buy as Omicron, Inflation Spook Markets

U.S. equity markets witnessed intense volatility over the past few days as concerns regarding the deadly Omicron variant of the coronavirus and rising inflation halted the rally and induced a downtrend. The stock market rally, which was perhaps fueled by a healthy corporate earnings season and improving economic fundamentals, was snapped by a rise in prices of essential consumer items and a higher infection rate. With Fed chief Jerome Powell signaling a faster bond tapering process despite downside risks to employment and inflation, the market witnessed a pullback due to the uncertainty. Nevertheless, secular growth drivers are expected to fuel growth in the long term.   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.

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.