As the market holds its breath amid a record-breaking calm and expectations of Fed rate cuts, three out of the “Magnificent 7”, Microsoft Corporation (MSFT), NVIDIA Corporation (NVDA), and Meta Platforms, Inc. (META), have emerged as top picks with high-ROE. These stocks could make worthy additions to your portfolio, offering a viable shield against economic turbulence.
In an unusually calm market stretch, the S&P 500 has gone 377 days without a major sell-off or a significant gain, according to CNBC’s FactSet data. This quiet period comes as investors flock to mega-cap tech stocks, betting that AI will boost profits. So far this year, the S&P 500 is up over 14%, buoyed by hopes of Federal Reserve rate cuts as inflation edges closer to the 2% target.
While markets see a slim 10% chance of a rate cut in July, some economists, like Steven Blitz from GlobalData TS Lombard, believe there's a 60% chance Fed Chairman Jerome Powell will cut rates next month to fend off a looming recession amid mixed economic signals.
Amid this uncertain landscape, investors should consider companies with strong efficiency ratios, such as Return on Equity (ROE). Why ROE? ROE is a key indicator of a company's financial health and its ability to generate profits from shareholders' equity. High-ROE companies efficiently use their capital to deliver superior returns, making them attractive investments in volatile markets.
As we await the Fed’s next move, MSFT, NVDA, and META shine as high-ROE stocks poised for superior returns.
Microsoft Corporation (MSFT)
With a robust $3.28 trillion market capitalization, MSFT develops and supports software, services, devices, and solutions worldwide. The company operates in Productivity and Business Processes; Intelligent Cloud; and More Personal Computing segments.
On May 1, Brookfield Asset Management Ltd. (BAM), Brookfield Renewable Partners L.P. (BEP), and MSFT announced a global renewable energy framework agreement to help the company achieve its goal of matching 100% of its electricity consumption with zero-carbon energy purchases by 2030.
This agreement builds on their existing collaboration and aims to decarbonize global energy supplies. It provides MSFT with access to new renewable energy capacity to support the growing demand for its cloud services.
On April 29, MSFT and Axel Springer SE announced an expanded partnership across advertising, AI, content, and cloud computing. The strategic cooperation aims to leverage cutting-edge innovation to support independent journalism worldwide. By combining their strengths in digital publishing and technology, the partnership seeks to accelerate growth in the AI era.
MSFT’s total revenues increased 17% year-over-year to $61.86 billion for the third quarter that ended March 31, 2024. Its operating income grew 23.4% from the year-ago value to $27.58 billion. The company’s net income and EPS came in at $21.94 billion and $2.94, reflecting increases of 19.9% and 20% from the prior year’s quarter, respectively.
In addition, the company’s total assets were $484.27 billion as of March 31, 2024, versus $411.98 billion as of June 30, 2023.
The consensus revenue estimate of $64.37 billion for the fiscal second quarter (ending June 2024) represents a 14.6% increase year-over-year. The consensus EPS estimate of $2.93 for the current quarter indicates a 9% improvement year-over-year. The company has an excellent surprise history, surpassing the consensus revenue and EPS estimates in each of the trailing four quarters.
MSFT’s trailing-12-month Return On Equity (ROE) of 38.49% is 828.4% higher than the industry average of 4.15%. Its 53.25% trailing-12-month EBITDA margin is 456.6% higher than the 9.57% industry average. Also, its trailing-12-month net income margin of 36.43% compares to the industry average of 2.88%.
Over the past nine months, the stock has gained 40.2% to close the last trading session at $449.78.
MSFT’s stance is apparent in its POWR Ratings. The stock has a grade B for Stability, Sentiment, and Quality. Among the 41 stocks in the B-rated Software - Business industry, it is ranked #20. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
Click here to access additional MSFT ratings (Growth, Value, and Momentum).
NVIDIA Corporation (NVDA)
NVDA provides graphics, computing, and networking solutions in the United States, Taiwan, China, Hong Kong, and internationally. The company has two segments: Compute & Networking and Graphics. Earlier this month, shares began trading at a new price following a 10-for-1 stock split, making the stock more accessible to a wider range of investors.
On June 17, NVIDIA announced Nemotron-4 340B, a family of open models for generating synthetic data to train Large Language Models (LLMs) in industries such as healthcare, finance, and retail. High-quality training data, crucial for LLM performance, is often expensive and hard to access.
Nemotron-4 340B, with its open model license, offers a free and scalable solution, reducing barriers and costs. This is expected to accelerate AI advancements by making quality training data more accessible and enhancing LLM development for commercial applications.
For the first quarter that ended April 28, 2024, NVDA's revenue increased by 262% year-over-year to a new record level of $26.04 billion. Its gross profit improved by 339% from the prior year period to $20.41 billion, while its operating income surged 690% from the year-ago value to $16.91 billion.
NVDA’s non-GAAP net income amounted to $15.24 billion or $6.12 per share, compared to $2.71 billion or $1.09 per share in the previous year’s quarter, respectively. Additionally, the company reported a free cash flow of $14.94 billion compared to $2.71 billion in the prior year’s quarter.
Street expects NVDA’s revenue for the second quarter (ending July 2024) to increase 109.9% year-over-year to $28.35 billion. The company’s EPS is expected to surge 134.7% from the prior year’s quarter to $0.63. Also, the company has topped the consensus revenue and EPS estimates in each of the four trailing quarters, which is remarkable.
NVDA’s 115.66% trailing-12-month ROE is substantially higher than the 4.15% industry average. Similarly, the stock’s trailing-12-month EBIT and net income margins of 59.85% and 53.40% favorably compare to their respective industry averages of 4.78% and 2.88%. In addition, the stock’s 36.38% trailing-12-month levered FCF margin is 258.9% higher than the 10.14% industry average.
Shares of NVDA have gained 199.7% over the past nine months and 155.6% year-to-date to close the last trading session at $126.57.
NVDA’s POWR Ratings reflect this outlook. It has an A grade for Quality and a B for Growth and Sentiment. Out of 92 stocks, NVDA is ranked #24 in the Semiconductor & Wireless Chip industry. To see the other ratings of NVDA for Value, Momentum, and Stability, click here.
Meta Platforms, Inc. (META)
Tech giant META develops products that enable people to connect and share with friends and family through mobile devices, personal computers, virtual reality headsets, and wearables worldwide. It operates in two segments: Family of Apps and Reality Labs.
META also owns Meta AI, a company dedicated to advancing artificial intelligence, augmented reality, and virtual reality technologies, positioning itself as an academic research lab for the AI community.
On the backs of solid financials, last month, META declared a quarterly cash dividend of $0.50 per share of the company’s outstanding Class A common stock and Class B common stock, payable to its shareholders on June 26, 2024. The company pays $2 annually, which translates to a yield of 0.40% on the prevailing price level.
During the first quarter, which ended March 31, 2024, META’s revenue increased 27.3% year-over-year to $36.46 billion. The company’s income from operations rose 91.1% from the prior year’s quarter to $13.82 billion.
Its net income and earnings per share for the quarter came in at $12.37 billion and $4.71, reflecting increases of 116.6% and 114.1% year-over-year, respectively. Also, its free cash flow surged 81.3% from the year-ago value to $12.53 billion.
Analysts expect META’s revenue for the second quarter (ending June 2024) to increase 19.4% year-over-year to $38.19 billion. The company’s EPS is expected to grow 57.1% year-over-year to $4.68 for the same quarter. Moreover, the company surpassed the consensus revenue and EPS estimates in each of the trailing four quarters.
META’s trailing-12-month EBIT margin of 39.53% is 348.6% higher than the industry average of 8.81%. Its trailing-12-month ROTC of 20.73% is 478.5% higher than the industry average of 3.58%. Also, its 33.36% trailing-12-month ROCE favorably compares with the industry average of 3.01%.
The stock has gained 74% over the past year to close the last trading session at $494.78.
META’s bright prospects are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.
META has an A grade for Quality. It is ranked #14 out of 51 stocks in the B-rated Internet industry.
In addition to the POWR Ratings highlighted above, one can access META’s ratings for Growth, Value, Momentum, Stability, and Sentiment here.
What To Do Next?
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MSFT shares closed at $449.78 on Friday, up $4.08 (+0.92%). Year-to-date, MSFT has gained 20.05%, versus a 14.91% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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