Business
5 High ROE Stocks to Buy as Low Inflation Fuels Rate Cut Hopes
5 High ROE Stocks to Buy as Low Inflation Fuels Rate Cut Hopes
About this update from Banco De Chile
The broader U.S. equity markets witnessed a steady uptrend over the past few trading days, buoyed by optimism related to rate cuts driven by easing inflationary pressures. The June consumer price index declined for the first time in more than four years by 0.1% from May, putting the 12-month rate at 3% – the lowest level in more than three years.These ignited hopes of a possible rate cut as early as September. The optimism was further propelled by Federal Reserve Chair Jerome Powell’s latest views that keeping interest rates elevated for too long could risk economic growth. The subtle hint of a less-restrictive stance probably aided the uptrend. A healthy quarterly earnings performance from hitherto reported companies added to the stock market euphoria.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. United Therapeutics Corporation UTHR, ABB Ltd ABBNY, Lockheed Martin Corporation LMT, MPLX LP MPLX and Banco de Chile BCH are some of the stocks with high ROE to profit from.ROE: A Key MetricROE = 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.Screening ParametersIn 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 ...