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Find Strong Stocks to Buy as Market Drops with this ROE Screen

The S&P 500 hit fresh lows on Monday and is now trading around where it was in December of 2020. Selling has heated up as Wall Street braces for what appears to be a large economic downturn or recession in the U.S. and around the globe. The economic slowdown is being spurred further by the Fed’s fight to bring down 40-year high inflation with rising interest rates.

The Fed’s 0.75% hike last week and its efforts in November and December are expected to lift the Fed Funds rate to between 4.25% and 4.5% by the end of 2022. These aggressive actions, combined with a flight to safety around the globe, have sent both the 10-year and the 2-year U.S. Treasuries to levels last seen during the financial crisis.

Higher rates impact equities markets in a variety of ways and are designed to curb spending, lending, and risk-taking. They make safe investments such as bonds more attractive, as well as lower what investors are willing to pay for risk in the form of valuation multiples, and beyond.

The higher interest rates have already cooled the housing market and taken massive chunks out of growth-focused stocks and the market. Crucially, the Fed’s efforts are already showing up in the outlook for S&P 500 earnings, with estimates for Q3, Q4, and fiscal 2023 all falling significantly since the early days of summer.  

As tough as it might be in the near term, the faster the economy cools off and prices start to come down the better shape the U.S. economy will be in over the long run and the quicker Wall Street will dive back into stocks.

Despite the decline and the economic uncertainty, pockets of the market continue to do well and many stocks have managed to climb in 2022. Today, we explore how investors can utilize an ROE screen to find companies that have proven they can turn assets into profits, which is especially important as U.S. economic growth slows.

ROE

Return on Equity or ROE helps investors understand if a firm’s executives are creating assets with investors’ cash or burning it. ROE shows a company’s ability to turn assets into profits. Put another way, this vital metric measures the profits made for each dollar of shareholder equity.

ROE is calculated as net income / shareholder's equity. For example: if $0.10 of assets are created for each $1 of shareholder equity that would equal a ROE of 10%.

Overall, Return on Equity is a great item to use regardless of what type of investor you are since it provides insight into management’s ability to create value and keep costs under control. Plus, if ROE slips, it can alert us to potential problems.

With all that said, let’s take a look at this screen’s parameters and see the companies proving they can return value to shareholders instead of churning through their cash…

• Zacks Rank equal to 1

The Zacks Rank looks at upward earnings estimate revisions, among other metrics, in order to find companies that are projected to see their earnings get stronger. In fact, beginning with a Zacks Rank #1 can be a great starting point because it boasts an average annual return of over 25% per year during the last 30 years.

• Price greater than or equal to 5

Today we ruled out any stocks that are trading for less than $5 a share because they can be more volatile and speculative.

• Price/Sales Ratio less than or equal to 1

On top of that, we are looking for a low price to sales ratio. Today we went with 1 or below as this range is usually thought to provide better value since investors pay less for each unit of sales.

• % (Broker) Rating Strong Buy equal to 100 (%)

In this screen, we decided to go with companies that brokers are fully on board with since ratings are typically skewed strongly toward ‘buy’ and ‘strong buy.’

• ROE greater than or equal to 10

Lastly, but most importantly for today’s screen, we got rid of any companies with Return on Equity of less than 10 because the median ROE value for all of the stocks in the Zacks Universe is under 10.

Here are two of the 17 stocks that made it through today’s screen…

SP Plus Corporation SP

SP Plus provides professional parking management, ground transportation, remote baggage check-in and handling, security, event logistics, and other tech-focused mobility solutions. The firm’s clients include companies in healthcare, aviation, hospitality, government, and other sectors throughout North America. SP shares have climbed 8% YTD, and its current Zacks average price target offers 58% upside to the roughly $30 per share it trades at right now.

Zacks estimates call for SP Plus revenue to climb 28% in FY22 and another 5% in FY23 to reach $808.9 million. This strong top-line growth is expected to help the mobility solutions firm expand its adjusted earnings by 50% this year and another 10% next year. SP Plus provided upbeat guidance in early August and it’s crushed our bottom-line estimates in three out of the last four quarters.

Universal Logistics Holdings, Inc. ULH

Universal Logistics’ subsidiaries provide a variety of customized transportation and logistics solutions in the U.S, Mexico, Canada, and Colombia. Universal Logistics’ offers services across the entire supply chain, including truckload, brokerage, intermodal, dedicated, and value-added services. Universal Logistics topped our second quarter earnings and revenue estimates on July 28, having reported new all-time record results, with revenue up 25% and adjusted earnings 78% higher.

Universal Logistics also lifted its outlook for FY22 and FY23 as its executive team remains confident its business will remain resilient in the face of economic slowdown fears. ULH’s adjusted earnings outlook has surged since its release and the firm has topped our quarterly EPS estimates by an average of 73% in the last four periods. Universal Logistics shares have soared 70% in 2022. ULH has also been buying back shares and its dividend yields 1.3% at the moment.

Get the rest of the stocks on this list and start looking for the newest companies that fit these criteria. It's easy to do. And it could help you find your next big winner. Start screening for these companies today with a free trial to the Research Wizard. You can do it.

Click here to sign up for a free trial to the Research Wizard today.

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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: https://www.zacks.com/performance/


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