Many investors that use traditional valuation metrics in their stock selection process have a tendency to focus on the price-to-book ratio and the price-to-earnings ratio. However, another valuation tool should be included as well, that being return on equity.
Return on equity is defined as the net income returned as a percentage of shareholders equity and measures a company's profitably by highlighting profits generated by the firm with shareholders' invested capital, according to Investopedia.
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While no sector has a monopoly on high ROE stocks, conventional wisdom holds that high growth companies often sport impressive ROEs. Additionally, it has been noted that comparisons across different industries are generally not helpful to predicting further upside, nor is using ROE on its own.
To add another element to the screen, a high return on equity (30 percent of more) was combined with a positive return on assets. Return on assets, or ROA, is a company's net income divided by total assets. This screen returned 53 large-caps and two mega caps, a large enough group for investors to look for high ROE and ROA stocks via ETFs. Here are some good ideas.
Technology Select Sector SPDR (NYSE:XLK) One can say what one wants about Apple (NASDAQ:AAPL) and there is no denying that the stock has been dreadful lately. There is also no denying that the iPad maker is one of two mega-caps to meet the ROA and ROE criteria set forth in our screen. The other is International Business Machines (NYSE:IBM), which combines with Apple for almost 21 percent of XLK's weight.
The rub here is that despite the ROA and ROE superlatives for two of XLK's largest holdings, that has not been a solid predictor of the ETF's performance. XLK is up less than five percent year-to-date and has been a laggard among major sector ETFs.
PowerShares Dynamic Food & Beverage Portfolio (NYSE:PBJ) Our screen returned a fair amount of consumer staples names and a few them are found among the PowerShares Dynamic Food & Beverage Portfolio's lineup. Among large-cap food names that impress with regards to both ROA and ROE, Hershey (NYSE:HSY) and Kellogg (NYSE:K) make the cut. Those two combine for over 10 percent of PBJ's weight.
Dean Foods (NYSE:DF), one of the mid-cap names generated by the screen, is another PBJ constituent with an allocation of 2.82 percent.
Industrial Select Sector SPDR (NYSE:XLI) Industrials are often capital intensive businesses, but that does not mean the group is not capable of posting strong ROA and ROE figures. That assertion is backed up by the amount of holdings from the Industrial Select Sector SPDR that popped up in our screen.
In alphabetical order the list includes Boeing (NYSE:BA), Caterpillar (NYSE:CAT), Deere (NYSE:DE), Lockheed Martin (NYSE:LMT) and Rockwell Automation (NYSE:ROK). Those stocks combine for about 13 percent of XLI's weight.
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