High-flying growth stocks have helped lift major indices this quarter. The S&P 500 is on track for a 4% gain, and the tech-heavy Nasdaq is set to rise by around 7%. Analysts attribute the gains to strong demand for artificial intelligence (AI) creating triple-digit growth for firms in that sector.
While consecutive record highs in the markets have sparked fatigue concerns, a narrow market focus and expectations of easing monetary policy could allow many high-flying growth stocks to continue outperforming.
Return on equity (ROE), calculated by dividing a company’s net income by shareholder equity, helps identify firms generating higher returns. Companies earning more profits can return more to shareholders through dividends or buybacks. This can potentially support further stock price increases.
Generally, businesses with an ROE that exceeds competitors tend to see faster stock price growth. An ROE over 15% is commonly viewed as satisfactory. However, traders may seek comparatively higher figures rather than focusing on thresholds.
After a period of solid equity market expansion, several high-flying growth stocks stand out for their strong ROE and potential to outpace the competition. The following three, in particular, could be well positioned in this regard.
ABB (ABBNY)
Swiss-based engineering and construction conglomerate ABB (OTCMKTS:ABBNY) is one of the high-flying growth stocks to watch closely. The company is well-known in North America for its robotics solutions.
ABB is well-positioned in the current market environment as pressure increases for companies to automate and incorporate AI to improve efficiencies. The company is also expanding its electrification activities in North America and is poised to play a key role in the future energy transition.
In its recent Q1 earnings, ABB reported a 240% jump in free cash flow (FCF) through efficiency initiatives. Both profit and operating margin achieved double-digit growth, with growth estimates for the current and next quarters over 75%.
Even with its stock price up 27% year-to-date (YTD), ABB continues to boast an impressive ROE of 28%.
PulteGroup (PHM)
The home building and finance company PulteGroup (NYSE:PHM) is a logical addition to the list of high-flying growth stocks. Despite the U.S. housing market being under pressure from high interest rates, it is expected to experience a rebound when the Federal Reserve finally eases up on rates, lowering the cost of mortgages.
PulteGroup stands out in its ability to benefit from both sides of that equation. While it builds homes, it also provides financing to potential home buyers. Despite adverse market conditions, it has also managed to generate 10% revenue growth over the past year. PHM boasts an ROE of 27%, above the industry average of 23%.
Notably, Pulte has been piling up cash on hand ($1.8 billion), positioning itself to capitalize on potentially lower rates right at the start of the easing cycle. Profit and operating margins stand at 16% and 20%, with YOY earnings growth at 32%.
The PHM stock price has grown 9% so far this year. Still, analysts see it continuing towards an average price target of $129.15, representing a potential 17% upside.
Banco de Chile (BCH)
Banco de Chile (NYSE:BCH) is the final pick of high-flying growth stocks as it has grown so fast it has outpaced many of its peers. Banks are often known for stability over rapid expansion, and this Chilean bank has delivered strong financial returns. The company provides banking and financial services across Latin America, with a focus on Chile. Chile saw notable economic growth in 2024, prompting the central bank to lower interest rates.
Banco de Chile maintains a relatively low level of non-performing loans by prioritizing high-quality loans and often refinancing top-performing customers from competitors. It also holds the country’s largest share of assets under management (AUM). This strategy of reducing financing expenses while steadily expanding revenue has proven successful, as the bank leads its market in profitability.
Banco de Chile realizes an ROE of 21.2%, far exceeding the average for U.S. banks. Additionally, it generously rewards shareholders through a 7.2% dividend yield. Analysts view further upside for the share price, carrying an average target of $24.07. This implies a 6% potential appreciation.
On the date of publication, Stavros Tousios did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.