5 high-ROE stocks to buy as markets recover from Fed sell-off

Investors rotating back into equities after the Federal Reserve-induced sell-off are targeting cash-rich companies with high return on equity, a metric that identifies firms efficiently deploying capital.

The broader equity markets reversed last week's Fed-driven decline as semiconductor stocks led a rally, with investors awaiting May PCE data for inflation clues.

"A high ROE ensures that the company is reinvesting cash at a high rate of return," the Zacks screening report said, noting that cash flow greater than $1 billion and ROE above the industry median were the primary filters.

The screen identified 16 stocks meeting the criteria, including Ross Stores, TE Connectivity, Banco Bilbao, Globe Life and Charles Schwab. Ross Stores carries a Zacks Rank #1, the firm's strongest rating, with long-term earnings growth of 11.5% and a trailing four-quarter earnings surprise of 10.2%.

The strategy comes as the Fed left rates unchanged at 3.5% to 3.75% under Chairman Kevin Warsh, with several officials suggesting a possible rate hike as early as October. Bond yields surged on the hawkish outlook before the market reversed course. Investors now face a period of backing and filling as they await the May PCE release for a clearer inflation picture.

How the Screen Works

Return on equity, calculated as net income divided by shareholders' equity, helps investors distinguish profit-generating companies from those burning cash. The metric measures how well a company multiplies its profits without investing new equity capital.

The Zacks screen applied additional filters beyond ROE. Stocks needed a price-to-cash-flow ratio below the industry median, meaning investors pay less for each dollar of free cash flow. Return on assets also had to exceed the industry median, and five-year historical EPS growth had to beat the industry average.

The Five Stocks

Ross Stores, the Dublin, California-based off-price retailer, targets middle-income households with prices 20% to 60% below regular department store prices. The company delivered an average earnings surprise of 10.2% over the past four quarters.

TE Connectivity, headquartered in Galway, Ireland, designs connectivity and sensor solutions across more than 130 countries. The company focuses on 5G, electric vehicles and industrial automation, with a long-term earnings growth expectation of 12.5%.

Banco Bilbao provides retail banking, wholesale banking and asset management across Spain, Mexico, Turkey, South America, the United States and Asia. The bank has a long-term earnings growth expectation of 16.9%.

Globe Life, the McKinney, Texas-based insurance holding company, markets individual life and supplemental health insurance to lower-middle and middle-income households. It delivered a trailing four-quarter earnings surprise of 1.1%.

Charles Schwab, the Westlake, Texas-based savings and loan holding company, provides wealth management, securities brokerage, banking and financial advisory services through nearly 400 branches. The company has a long-term earnings growth expectation of 17.8%.

This article is for informational purposes only and does not constitute investment advice.