Low PE High ROE US Stocks — Cheap on Earnings but Highly Profitable on NYSE & NASDAQ

Low PE High ROE screens for stocks trading cheaply on earnings (P/E below 15) while generating exceptional returns on shareholders' equity (ROE above 15%). The combination is powerful because high-ROE businesses usually command premium P/E multiples — finding both simultaneously often signals the market has temporarily overlooked a quality business.

ROE (Return on Equity) = Net Income / Shareholders' Equity × 100. It measures profit generated per dollar of equity. Consistently high ROE (above 15%) almost always indicates genuine competitive advantage — pricing power, switching costs, or network effects that protect returns from competitors. Warren Buffett has cited ROE above 15% consistently as a key quality filter.

ROE can be artificially inflated by using heavy debt. A company borrowing at 5% to deploy capital at 15% looks great on ROE until interest rates rise or credit markets tighten. The D/E below 1 filter specifically excludes leverage-driven ROE, ensuring the high returns reflect genuine operational excellence and not financial engineering.

This screen uses P/E between 1 and 15. A P/E of 15 has historically approximated the long-run average US equity market valuation. Below 15 is value territory by historical standards. The lower bound of 1 excludes loss-making companies (negative P/E) where the P/E ratio is not meaningful as a valuation metric.

Low PE High ROE uses equity returns (ROE) and excludes debt from the quality metric. The Magic Formula uses capital returns (ROCE) which includes both equity and debt capital in the denominator. ROCE is harder to manipulate with leverage. Both screens target quality-at-value but from slightly different angles — combining results from both provides stronger conviction.

Consumer staples, healthcare, technology (especially mature software), financial services (well-managed banks and insurance companies), and certain industrials. Asset-light businesses with recurring revenue and strong pricing power generate high ROE naturally. Capital-intensive sectors (utilities, basic materials) less commonly appear because their ROE is structurally compressed.

Yes, as a minimum quality filter for US large-cap stocks. The average S&P 500 company earns ROE around 12–15%. A threshold of 15% specifically filters for above-average performers. For true quality compounders, look for ROE consistently above 20% over 5+ years. The 15% threshold is the floor, not the target.

Yes. ROE measures historical performance, not future prospects. A high-ROE business in a disrupted industry may see ROE collapse as competitive advantages erode. A company at peak cyclical earnings will show high ROE temporarily. And a business with heavily leveraged ROE faces risk if interest rates rise or credit conditions tighten. Always verify the durability of ROE through business analysis, not just the ratio.

The count varies daily with market conditions and earnings cycle, but typically 50–150 stocks meet all three criteria simultaneously across NYSE and NASDAQ. During broad market sell-offs, more high-quality companies trade at lower P/E multiples, expanding the list. During bull markets, quality stocks command premium valuations and fewer pass the P/E filter.

Best used as part of a broader research process. Cross-reference with Free Cash Flow Champions to verify earnings quality. Check Consistent 5-Year Earnings to confirm ROE durability. Use Strong Balance Sheet to add liquidity safety. The Low PE High ROE combination is a strong initial filter — individual company analysis should follow before any investment decision.