August is off to a hot start, with the Nasdaq at new highs, driven by gains from Apple and others tech giants. Wall Street continues to dive into tech as it proves resilient to the coronavirus economic downturn.
The overall third quarter earnings outlook has also improved and investors are already looking well beyond last week’s rough second-quarter GDP data from the U.S. and Germany. And the economy really has no choice but to adapt to Covid-19 even as the hopes for a vaccine mount. It also can’t be said enough that Wall Street is poised to remain in don’t fight the Fed mode, with interest rates at historic lows.
That said, investors still need to hunt for companies that are able to maintain a solid financial position. Therefore, we searched for stocks by utilizing one of the quickest and best gauges of how effectively management runs a company: Return on Equity.
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.