RH (NYSE: RH), Yeti Holdings (NYSE: YETI) and 360 Digitech (NASDAQ: QFIN) hail from very different parts of the post-Covid economy; in addition to strong price appreciation, they have another thing in common.
They all boast high return on equity.
Believe it or not, return on equity is a key measure for identifying growth stocks with excellent potential. It’s yet one more way, in addition to screening for sales and earnings, investors should also identify stocks with return on equity of 17% or higher.
Researchers found that level is an indication of good management, making the stock more likely to notch further price gains.
ROE is, in some ways, related to earnings growth. It’s a very specialized metric that shows you how well a company is generating a return from the money invested.
ROE is a fairly simple calculation. Take a company’s net income and divide that number by total shareholder equity. To get the ratio, multiple that number by 100.
RH has a return on equity of 199%. The stock has been consolidating since retreating from an April 29 high of $731.05.
RH gapped up 15.67% on June 10, rallied to a high of $719.77 in the following session before pulling back. It may be forming a handle to add to the cup pattern that’s been forming.
The company, which operates retail stores in 39 states, selling hardware, bath fixtures, lighting, furniture and accessories, is fast catching on as a lifestyle brand. Outfitting homes was a key area for pandemic-era spending, and those habits are continuing now that restrictions are fast winding down.
The gap-up followed a better-than-expected quarterly earnings report. Earnings per share came in at $4.89, up a whopping 285% from the previous year. Revenue was $860.8 million, an increase of 78%. The company also increased its full-year guidance.
A new point may arrive if the stock goes on to form a handle and pass the recent high of $719.77.
Meanwhile, Yeti Holdings, maker of outdoor gear, boasts a very solid return on equity of 80%. This company, too, got a boost during Covid-19 restrictions, as Americans headed outdoors. That trend is continuing,
The stock advanced 5.40% following its earnings report on May 13. Year-to-date, the price is up 35.15% year-to-date and 157.99% over the past year. The company beat on both the top- and bottom lines. Earnings per share were up 245% year-over-year, to $0.38. Revenue grew 42% to $247.6 million.
The stock is up 13.66% since its earnings report.
As you might imagine, the direct-to-consumer channel is growing rapidly, making an ever-greater contribution to the top line.
Yeti shares cleared an area of tight trade on June 7, and closed Tuesday at $92.54, still above its May 24 buy point of $91.55. The stock is holding above its 10-day moving average. While the broader market remains in an uptrend, the stock is a buy candidate.
360 DigiTech, a China-based company that runs a digital platform for financial institutions, has a return on equity of 45%.
Its platform allows financial-industry clients to offer products and services to a wide base of consumers. It also offers a software-as-a-service risk management service for institutional customers. Revenue rose fast as customers worldwide began conducting more transactions online during the pandemic.
The company issued a mixed quarterly report on May 27. Earnings grew 458% to $1.34 per share, the third quarter in a row of growth acceleration. Revenue grew at a healthy clip of 22%, to $549.3 million. Despite that good look, that growth rate was the slowest in the past eight quarters.
The stock zoomed 20.27% higher on June 1, and ended that week at $36.57, up 30.28%. Turnover was almost double the average. 360 DigiTech is up 52.69% this month, in more than twice the normal volume.
The stock is currently extended from a buy point, and definitely not in buy range at this time. Investors should wait for the next base to form, or at least for the stock to pull back and find support at a key moving average.
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