Business
5 High ROE Stocks to Buy as Market Dips on Soft Manufacturing Data
5 High ROE Stocks to Buy as Market Dips on Soft Manufacturing Data
About this update from Banco De Chile
The broader U.S. equity markets had a shaky start to the September trading month, with leading benchmark indices declining sharply as premier blue-chip technology stocks stumbled. This is reminiscent of the trend in the preceding month that witnessed a tumultuous start followed by healthy growth in late August that more than reversed the decline.While the 12-month inflation rate of 2.9% (the lowest since March 2021) in mid-August gave an uncertain market some direction and evoked strong signals from Federal Reserve Chair Jerome Powell about interest rate cuts happening soon, two recent readings of manufacturing production showed signs of weakness. In what appeared to be a highly data-sensitive market, the downtrend was induced by a decline in Global Manufacturing PMI by S&P Global from 49.7 in July to 49.5 in August, while the ISM manufacturing index came in at a lower-than-expected reading of 47.2% for the month. This reignited concerns regarding the overall health of the economy and cast doubts over the probable rate cuts this month. 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. Upbound Group, Inc. UPBD, The AES Corporation AES, 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’ 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.Parameters Used for ScreeningIn order to shortlist stocks that are cash-rich with high ROE, we have ...