5 Top ROE Stocks For A Spooky September

One of the historic realities of the equity market has been its relatively poor performance in the month of September. Statistics reveal that since 1950, the Dow Jones Industrial Average (DIA) and S&P 500 index (SPY) declined 1.1% and 0.7%, respectively, on an average in September, while Nasdaq  (QQQ) witnessed an average decline of 1% since it was established in 1971.

A string of events are scheduled for this dreaded month that could rattle the financial markets. Amid such adversities, investors are often on the lookout for ‘cash cow’ stocks that would enable them to rake in more profits.

However, singling out cash-rich stocks alone does not make them a solid investment proposition unless they are backed by attractive efficiency ratios like return on equity (ROE). A high ROE ensures that the company is reinvesting its cash at a high rate of return.

ROE: A Key Financial Metric

ROE = Net Income/Shareholders’ Equity

ROE helps investors distinguish between profit-generating companies from profit burners and is useful for determining the financial health of a company. In other words, this financial metric enables investors to identify stocks 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 growing its profits without investing any new equity capital in the business and portrays management efficiency in rewarding shareholders with attractive risk-adjusted returns.

Parameters Used for Screening

In order to shortlist stocks that are cash rich with high ROE, we added Cash Flow greater than $1 billion and ROE greater than X-Industry as our primary screening parameters. In addition, we take a few other criteria into consideration to arrive at a winning strategy. 

Price/Cash Flow less than X-Industry: This metric measures how much investors pay for one dollar of free cash flow. A lower ratio indicates that investors need to pay less for a better cash flow generating stock.

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Charles Howard 3 years ago Member's comment

I have 3 of these and so far none of them has shown a desire to break out!!