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5 Best ROE Stocks to Augment Your Portfolio Returns

A recent run of disappointing economic data, including a lackluster nonfarm-payroll reading and jobless claims, have dented the financial markets’ expectations of a smooth economic recovery. In such a topsy-turvy market, where money can play a key role in surviving carnage, investors are looking for ‘cash cow’ stocks to milk for cash or profits.

However, singling out cash-rich stocks alone does not make them a solid investment proposition unless they are backed by attractive efficiency ratios like return on equity (ROE). A high ROE ensures that the company is reinvesting its cash at a high rate of return.

ROE: The X-Factor?

ROE = Net Income/Shareholders’ Equity

ROE separates the sheep from the goats and helps investors distinguish between profit-generating companies from profit burners. In other words, this financial metric enables investors to identify those stocks that diligently deploy cash for higher investor returns instead of piling up the dry powder.

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 growing its profits without investing any new equity capital in the business and portrays management efficiency in rewarding shareholders with attractive risk-adjusted returns.

The Game-Changing Strategy

In order to shortlist stocks that are cash rich with high ROE, we added Cash Flow greater than $1 billion and ROE greater than X-Industry as our primary screening parameters. However, these are not the ultimate criteria for short listing stocks in a turbulent market. As such, we have added a few additional criteria to arrive at a winning strategy.  

Price/Cash Flow less than X-Industry:This metric measures how much investors pay for one dollar 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 its assets, which include cash, accounts receivable, property, equipment, inventory and furniture. Of course, the higher the ROA, the better it is.

5 Year EPS Historical Growth greater than X-Industry:This criterion indicates that continued earnings momentum has translated to 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 5 of the 12 stocks that qualified the screening:

Braskem S.A. (BAK)

Michael Kors Holdings Limited (KORS)

Lear Corp. (LEA)

Electronic Arts Inc. (EA)

Stryker Corporation (SYK)

With an enviable cash pile, these stocks appear to be enterprising picks when they are blended with other attractive features like high ROE, high ROA and solid historical earnings growth along with a solid Zacks Rank.

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: http://www.zacks.com/performance.

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LEAR CORPORATN (LEA): Free Stock Analysis Report
 
STRYKER CORP (SYK): Free Stock Analysis Report
 
BRASKEM SA (BAK): Free Stock Analysis Report
 
ELECTR ARTS INC (EA): Free Stock Analysis Report
 
MICHAEL KORS (KORS): Free Stock Analysis Report
 
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