Business
Buy 5 High ROE Stocks as Middle East Tensions Spark Oil Crisis
Buy 5 High ROE Stocks as Middle East Tensions Spark Oil Crisis
About this update from Banco De Chile
Just when it appeared that the broader U.S. equity markets were cruising on a smooth sail buoyed by a solid economy, the escalating geopolitical tensions in the Middle East have doused investor enthusiasm. Stocks tumbled across the board as Iran fired ballistic missiles at Israel to avenge the death of Hezbollah leader Hassan Nasrallah and an Iranian commander in Lebanon. With Israel launching a counter-offensive strike against Lebanon, markets remained on the tenterhooks as the energy crisis began to soar. Crude oil prices have surged on the market uncertainty as traders brace for more volatility slugfest.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. Lockheed Martin Corporation LMT, CF Industries Holdings, Inc. CF, 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 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 for $1 of free cash flow. A lower ratio indicates that investors need to pay less for a better cash flow-generating stock.Return on...