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Shrugging off initial setbacks, the broader U.S. equity markets witnessed a steady uptrend over the past couple of trading days and hit record-high territory in a month historically known as the worst for the benchmark indices. The stock market rally was driven by broad-based expectations of an interest rate cut by the Federal Reserve.
However, despite a half-percentage-point rate cut to a range of 4.75% to 5.00%, akin to the expectations — the first rate cut in four years — the markets failed to hold on to the gains and fell off the peak after a steep ascent. The volatility was induced by fears that the Fed was trying to get ahead of potential economic weakness by skipping its traditional quarter-point cut. However, the central bank tried its best to assuage the concerns. Fed Chair Jerome Powell later clarified that the outsized interest rate cut was driven by cooling inflation, which was moving toward a sustainable level of 2%.
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. Upbound Group, Inc. UPBD, The Hartford Financial Services Group, Inc. HIG, Arch Capital Group Ltd. ACGL, PulteGroup, Inc. PHM and Banco de Chile BCH are some of the stocks with high ROE to profit from.
ROE: A Key Metric
ROE = Net Income/Shareholders’ Equity
ROE 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.
Screening Parameters
In 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 Assets (ROA) greater than X-Industry: This metric determines how much profit a company earns for every dollar of asset, which includes cash, accounts receivable, property, equipment, inventory and furniture. The higher the ROA, the better it is for the company.
5-Year EPS Historical Growth greater than X-Industry: This criterion indicates that continued earnings momentum has translated into solid cash strength.
Zacks Rank less than or equal to 2: Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform irrespective of the market environment.
Here are five of the eight stocks that qualified the screening:
Upbound Group: Headquartered in Plano, TX, Upbound Group (formerly Rent-A-Center, Inc.) is a leading lease-to-own provider with operations in the United States, Puerto Rico and Mexico. The company provides services to a large portion of consumers by providing them access and the opportunity to obtain ownership of high-quality, durable products under a flexible lease purchase agreement with no long-term debt obligation.
The company delivered a trailing four-quarter earnings surprise of 3.8% on average. It has a VGM Score of B. Upbound Group carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Hartford Financial: Headquartered in Hartford, CT, Hartford Financial is one of the major multi-line insurance and investment companies in the country, providing investment products, group life and group disability insurance, property and casualty insurance and mutual funds in the United States. It sells various innovative products through multiple distribution channels to individuals and businesses and is considered a leading property and casualty and employee group benefits insurer.
It has a long-term earnings growth expectation of 12.4% and delivered a trailing four-quarter earnings surprise of 13.1%, on average. Hartford Financial carries a Zacks Rank #2.
Arch Capital: Headquartered in Pembroke, Bermuda, Arch Capital offers insurance, reinsurance and mortgage insurance across the world. It provides a wide range of products and services, which include primary and excess casualty coverages, professional indemnity, workers’ compensation and umbrella liability and employers’ liability insurance coverages. The company offers a full range of property, casualty and mortgage insurance and reinsurance lines while maintaining a focus on writing specialty lines of insurance and reinsurance.
It has a long-term earnings growth expectation of 6.1% and delivered a trailing four-quarter earnings surprise of 28.9%, on average. It has a VGM Score of B. Arch Capital carries a Zacks Rank #2.
PulteGroup: Based in Atlanta, GA, PulteGroup engages in homebuilding and financial services businesses, primarily in the United States. The company conducts operations through two primary business segments – Homebuilding and Financial Services. The company engages in maintaining a 50/50 balance between build-to-order and spec sales, enabling it to meet immediate demand with spec homes while accommodating buyers who prefer to customize their homes with build-to-order options.
The company has a long-term earnings growth expectation of 19% and delivered a trailing four-quarter earnings surprise of 10%, on average. It has a VGM Score of B. PulteGroup carries a Zacks Rank #2.
Banco de Chile: Headquartered in Santiago, Chile, Banco de Chile provides various banking services to customers in the Latin American country. These include deposit accounts, loans, payment-related cards and insurance solutions. The company also offers services such as cash management, treasury, financial advisory, trade finance, leasing, factoring, payment, payroll, collection, mutual fund management, securities brokerage, currency trading, investment management, collection, securitization and capital markets services.
It delivered a trailing four-quarter earnings surprise of 6.1%, on average. Banco de Chile carries a Zacks Rank #2.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
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.
Zacks Investment Research
Looking for broad exposure to the Mid Cap Blend segment of the US equity market? You should consider the John Hancock Multifactor Mid Cap ETF (JHMM), a passively managed exchange traded fund launched on 09/28/2015.
The fund is sponsored by John Hancock. It has amassed assets over $3.92 billion, making it one of the larger ETFs attempting to match the Mid Cap Blend segment of the US equity market.
Why Mid Cap Blend
Compared to large and small cap companies, mid cap businesses tend to have higher growth prospects and are less volatile, respectively, with market capitalization between $2 billion and $10 billion. Thus, companies that fall under this category provide a stable and growth-heavy investment.
Typically holding a combination of both growth and value stocks, blend ETFs also demonstrate qualities seen in value and growth investments.
Costs
When considering an ETF's total return, expense ratios are an important factor, and cheaper funds can significantly outperform their more expensive counterparts in the long term if all other factors remain equal.
Annual operating expenses for this ETF are 0.42%, putting it on par with most peer products in the space.
It has a 12-month trailing dividend yield of 1.03%.
Sector Exposure and Top Holdings
Even though ETFs offer diversified exposure that minimizes single stock risk, investors should also look at the actual holdings inside the fund. Luckily, most ETFs are very transparent products that disclose their holdings on a daily basis.
This ETF has heaviest allocation to the Industrials sector--about 19.40% of the portfolio. Financials and Information Technology round out the top three.
Looking at individual holdings, United Rentals Inc (URI) accounts for about 0.62% of total assets, followed by Lennar Corp A (LEN) and Hartford Financial Svcs Grp (HIG).
The top 10 holdings account for about 4.77% of total assets under management.
Performance and Risk
JHMM seeks to match the performance of the John Hancock Dimensional Mid Cap Index before fees and expenses. The John Hancock Dimensional Mid Cap Index comprises of a subset of securities in the U.S. Universe issued by companies whose market capitalizations are between the 200th and 951st largest U.S. company.
The ETF has added about 12.23% so far this year and was up about 22.14% in the last one year (as of 09/19/2024). In the past 52-week period, it has traded between $44.18 and $58.94.
The ETF has a beta of 1.08 and standard deviation of 19% for the trailing three-year period, making it a medium risk choice in the space. With about 664 holdings, it effectively diversifies company-specific risk.
Alternatives
John Hancock Multifactor Mid Cap ETF carries a Zacks ETF Rank of 3 (Hold), which is based on expected asset class return, expense ratio, and momentum, among other factors. Thus, JHMM is a good option for those seeking exposure to the Style Box - Mid Cap Blend area of the market. Investors might also want to consider some other ETF options in the space.
The Vanguard Mid-Cap ETF (VO) and the iShares Core S&P Mid-Cap ETF (IJH) track a similar index. While Vanguard Mid-Cap ETF has $68.41 billion in assets, iShares Core S&P Mid-Cap ETF has $89.43 billion. VO has an expense ratio of 0.04% and IJH charges 0.05%.
Bottom-Line
Retail and institutional investors increasingly turn to passively managed ETFs because they offer low costs, transparency, flexibility, and tax efficiency; these kind of funds are also excellent vehicles for long term investors.
To learn more about this product and other ETFs, screen for products that match your investment objectives and read articles on latest developments in the ETF investing universe, please visit Zacks ETF Center.
Zacks Investment Research
Shares of Radian Group RDN closed at $35.15 on Tuesday, near its 52-week high of $37.86. Improving mortgage insurance portfolio, declining claims, a well-performing homegenius segment, a solid capital position and effective capital deployment are driving the price higher.
Radian Group continued to benefit from positive credit performance in the mortgage insurance portfolio. With strong persistency rates and the current positive industry pricing environment, RDN expects in-force portfolio premium yield to remain stable.
Shares have gained 23.2% year to date, outperforming the industry’s increase of 16.4%, the Finance sector’s rise of 14.3% and the Zacks S&P 500 composite’s increase of 18.1% in the said time frame.
RDN Outperforms Industry, Sector, S&P 500 YTD
RDN shares are trading well above the 50-day moving average, indicating a bullish trend.
RDN’s Northbound Estimate Revision Instills Confidence
Both the analysts covering the stock raised estimates for the current and next year. The Zacks Consensus Estimate for RDN’s 2024 and 2025 earnings has moved 6.5% and 1.7% north, respectively, in the past 60 days, reflecting analyst optimism.
RDN’s Return on Capital
Return on invested capital in the trailing 12 months was 8.2%, better than the industry average of 2.4%, reflecting RDN’s efficiency in utilizing funds to generate income.
Factors Acting in Favor of Radian
The company has intensified its focus on the core business and services with higher growth potential, ensuring a predictable and recurring fee-based revenue stream.
New business, combined with increasing annual persistency, should drive continued growth of the insurance-in-force portfolio. Radian’s mortgage insurance portfolio creates a strong foundation for future earnings.
RDN has been witnessing a declining pattern of claim filings. Thus, we expect paid claims to decrease further. A decline in loss and claims will strengthen the balance sheet and hence improve its financial profile.
The insurer has been strengthening its capital position with capital contribution, reinsurance transaction and cash position. This, in turn, aids the insurer to engage in wealth distribution.
RDN Shares Are Undervalued
RDN shares are trading at a price-to-book multiple of 1.18, lower than the industry average of 2.60. Its pricing at a discount to the industry average gives a better entry point to investors.
Shares of other insurers like MGIC Investment Corporation MTG are trading at a multiple lower than the industry average, while that of Arch Capital Group ACGL are trading at a multiple higher than the industry average.
Parting Thoughts
Radian expects that the private mortgage insurance market will be approximately $300 billion in 2024, consistent with the prior year. It expects a healthy purchase market in 2024, driven by ongoing homebuyer demand and an expected decline in interest rates, which is a positive for mortgage insurers. The company believes that the resulting pent-up demand provides strong support for future purchase volume, which drives the growth in large and valuable insurance in-force portfolio.
The 9% increase in quarterly dividend in the first quarter of 2024 marks the fifth consecutive year in which RDN has increased the quarterly dividend, with a total increase of 96% over the past four years. Its current dividend yield of 2.7% betters the industry average of 2.5%, making it an attractive pick for yield-seeking investors.
Given its attractive valuation, this Zacks Rank #2 (Buy) mortgage insurer is a strong contender for addition to one’s portfolio.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Zacks Investment Research
Homebuilder stocks are hitting new highs as anticipation builds ahead of the Federal Reserve’s upcoming rate cut decision. Both Lennar Corp and PulteGroup, Inc. surged to 52-week highs on Sept. 18, with Lennar reaching $190.12 and PulteGroup hitting $141.43.
The rally comes as investors bet that the Fed’s expected rate cut could further boost the already resurgent housing market.
Lower Rates To Benefit Home Builder Stocks
A note from Bank of America Securities highlights that the rally in homebuilder stocks has been underway since early July, coinciding with a drop in 30-year mortgage rates from 7% to 6.2%.
“Lower rates would benefit home demand,” the note added, suggesting that a Federal Reserve cut of 25 to 50 basis points would add fuel to the fire for the housing sector.
Read Also: Homebuilder Stocks Outperform Ahead Of Potential Rate Cuts — But What’s Next?
Lennar’s Cash Flow Yield In Focus As It Reports Q3 Earnings
Lennar, up 26.78% year to date and nearly 60% over the past year, has been a standout performer, benefiting from strong demand and improved earnings multiples. The company is expected to release its third-quarter earnings tomorrow (Thursday), which could provide further insights into its performance.
Bryn Talkington of Requisite Capital Management also pointed to Lennar's impressive free cash flow yield of 11%, making it an attractive play for investors seeking value amid the rate cut frenzy.
PulteGroup’s Margins Continue To Impress Investors
PulteGroup, up a whopping 82.46% over the past year, followed a similar path. The company, which develops single-family homes under well-known brands such as Pulte Homes and Centex, continues to enjoy top-of-the-line margins despite industry headwinds like inflation and a soft labor market.
Analysts believe the Fed's expected rate cut will temporarily relieve the housing affordability crisis, though long-term challenges remain.
Lennar and PulteGroup are positioned to keep riding the wave as the Fed’s decision looms. Investors eyeing exposure to the housing sector may want to watch closely.
Read Next:
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Shares of MGIC Investment Corporation MTG closed at $25.30 on Tuesday, near its 52-week high of $25.93. Solid insurance in force, a decline in loss and claims payments, lower delinquency, better housing market fundamentals and prudent capital deployment are driving the price higher.
Given the strong purchase market and potential share gains from the Federal Housing Administration, MGIC Investment expects strong premium writing. Increased persistency rate should continue to boost insurance in force.
Shares have gained 31.2% year to date, outperforming the industry’s increase of 15.8%, the Finance sector’s rise of 14.1% and the Zacks S&P 500 composite’s increase of 18.1% in the said time frame.
MTG Outperforms Industry, Sector, S&P 500 YTD
MTG shares are trading well above the 50-day moving average, indicating a bullish trend.
MTG’s Northbound Estimate Revision Instills Confidence
All three analysts covering the stock raised estimates for the current and next year. The Zacks Consensus Estimate for MTG’s 2024 and 2025 earnings has moved 2.2% and 1.5% north, respectively, in the past 30 days, reflecting analyst optimism.
MTG’s Return on Capital
Return on invested capital in the trailing 12 months was 11.4%, better than the industry average of 2.4%, reflecting MTG’s efficiency in utilizing funds to generate income.
Factors Acting in Favor of MGIC Investment
The insurance-in-force portfolio is set to grow, banking on new business and increasing annual persistency. A higher level of new and existing home sales, an increased percentage of homes purchased for cash and an improved level of refinance activity in an improving housing market should help this largest private mortgage insurer in the United States grow.
MTG has been witnessing a declining pattern of claim filings. A decline in loss and claims will strengthen the balance sheet and improve the insurer’s financial profile.
The insurer is improving its capital position with capital contribution, reinsurance transactions and cash position. Both leverage and times interest earned ratios have been improving.
A solid capital position supports MTG in wealth distribution. The company currently has $724 million remaining in its authorization kitty through December 2026. Its share repurchase activity reflects continued strong mortgage credit performance.
MTG’s Optimistic Growth Outlook
The Zacks Consensus Estimate for 2024 earnings is pegged at $2.76 per share, suggesting an increase of 9.1% on 4.7% higher revenues of $1.2 billion. The consensus estimate for 2025 earnings per share is $2.76, flat year over year on 4.6% higher revenues of $1.3 billion. The long-term expected earnings growth rate is 6.8%.
MTG Shares Are Undervalued
MTG shares are trading at a price-to-book multiple of 1.28, lower than the industry average of 2.60. Its pricing, at a discount to the industry average, gives a better entry point to investors.
Shares of other insurers like Radian Group RDN are trading at a multiple lower than the industry average, while that of Arch Capital Group ACGL are trading at a multiple higher than the industry average.
Parting Thoughts
MTG has been seeing improving housing market fundamentals, such as household formations and home sales and the current capital status. Higher premiums, outstanding credit quality and new business will continue to induce growth for MCIG.
The latest 13% increase in its quarterly dividend to 13 cents per share marked four straight years of dividend increases at a compound annual growth rate of 21%. Its current dividend yield is 2.1%.
Given its attractive valuation and upbeat prospects, this Zacks Rank #1 (Strong Buy) mortgage insurer is a strong contender for addition to one’s portfolio.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Zacks Investment Research
New construction on single-family homes in the U.S. jumped in August as mortgage rates trend downward and the Federal Reserve is expected to cut rates on Wednesday for the first time in four years.
Single-family housing starts last month came in at an annualized rate of 992,000 units, up 15.8% from a revised figure of 857,000 for July, according to Commerce Department data released on Wednesday.
Starts for all privately-owned housing in August totaled an annualized rate of 1.356 million units, up 9.6% from the July revised estimate of 1.237 million and up 3.9% from the August 2023 rate of 1.305 million.
Single-family housing completions reached an annualized rate of 1.029 million in August, registering a 5.6% decline from July’s revised rate of 1.09 million.
Completions for all privately-owned homes in August were at a seasonally adjusted annual rate of 1.788 million, up 9.2% from the July revised estimate of 1.637 million and 30.2% above the July 2023 rate of 1.373 million.
Read Also: Housing Starts Rebound, Lift Homebuilder Stocks: Sign Of Economic Resilience
Building permits also rose last month, Commerce Department data showed.
Single-family authorizations in August were at a rate of 967,000, up 2.8% from the revised July figure of 941,000.
Privately-owned housing units authorized by building permits in August were at a seasonally adjusted annual rate of 1,475,000. That’s up 4.9% from the July revised rate of 1.406 million but below the August 2023 rate of 1.578 million.
The average rate for 30-year mortgages fell 14 basis points in the week ended Sept. 13 to 6.15%, marking the lowest rate since September 2022, according to the Mortgage Bankers Association.
The Federal Reserve is expected to lower its key interest rate ranging from 5% to 5.25% on Wednesday by either 25 or 50 basis points, signifying its first rate decline in four years.
Price Action: Homebuilders slid into Wednesday’s mid-day trading.
Exchange-traded funds that hold homebuilder stocks showed gains and losses.
Read Now:
Image: Shutterstock
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Have you been paying attention to shares of Arch Capital Group (ACGL)? Shares have been on the move with the stock up 10.9% over the past month. The stock hit a new 52-week high of $114.69 in the previous session. Arch Capital Group has gained 53.4% since the start of the year compared to the 16.6% move for the Zacks Finance sector and the 27.8% return for the Zacks Insurance - Property and Casualty industry.
What's Driving the Outperformance?
The stock has a great record of positive earnings surprises, as it hasn't missed our earnings consensus estimate in any of the last four quarters. In its last earnings report on July 30, 2024, Arch Capital reported EPS of $2.57 versus consensus estimate of $2.17 while it beat the consensus revenue estimate by 0.66%.
For the current fiscal year, Arch Capital is expected to post earnings of $9.01 per share on $15.56 billion in revenues. This represents a 6.63% change in EPS on a 15.33% change in revenues. For the next fiscal year, the company is expected to earn $9.23 per share on $16.98 billion in revenues. This represents a year-over-year change of 2.46% and 9.16%, respectively.
Valuation Metrics
Arch Capital may be at a 52-week high right now, but what might the future hold for the stock? A key aspect of this question is taking a look at valuation metrics in order to determine if the company is due for a pullback from this level.
On this front, we can look at the Zacks Style Scores, as they provide investors with an additional way to sort through stocks (beyond looking at the Zacks Rank of a security). These styles are represented by grades running from A to F in the categories of Value, Growth, and Momentum, while there is a combined VGM Score as well. The idea behind the style scores is to help investors pick the most appropriate Zacks Rank stocks based on their individual investment style.
Arch Capital has a Value Score of B. The stock's Growth and Momentum Scores are D and B, respectively, giving the company a VGM Score of B.
In terms of its value breakdown, the stock currently trades at 12.7X current fiscal year EPS estimates, which is not in-line with the peer industry average of 13.6X. On a trailing cash flow basis, the stock currently trades at 12.8X versus its peer group's average of 13.2X. Additionally, the stock has a PEG ratio of 2.06. This isn't enough to put the company in the top echelon of all stocks we cover from a value perspective.
Zacks Rank
We also need to look at the Zacks Rank for the stock, as this supersedes any trend on the style score front. Fortunately, Arch Capital currently has a Zacks Rank of #2 (Buy) thanks to favorable earnings estimate revisions from covering analysts.
Since we recommend that investors select stocks carrying Zacks Rank of 1 (Strong Buy) or 2 (Buy) and Style Scores of A or B, it looks as if Arch Capital passes the test. Thus, it seems as though Arch Capital shares could still be poised for more gains ahead.
How Does ACGL Stack Up to the Competition?
Shares of ACGL have been soaring, and the company still appears to be a decent choice, but what about the rest of the industry? One industry peer that looks good is W.R. Berkley Corporation (WRB). WRB has a Zacks Rank of # 2 (Buy) and a Value Score of A, a Growth Score of C, and a Momentum Score of A.
Earnings were strong last quarter. W.R. Berkley Corporation beat our consensus estimate by 13.04%, and for the current fiscal year, WRB is expected to post earnings of $4.03 per share on revenue of $13.55 billion.
Shares of W.R. Berkley Corporation have gained 1.4% over the past month, and currently trade at a forward P/E of 14.42X and a P/CF of 16.99X.
The Insurance - Property and Casualty industry is in the top 8% of all the industries we have in our universe, so it looks like there are some nice tailwinds for ACGL and WRB, even beyond their own solid fundamental situation.
Zacks Investment Research
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