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Pick 4 Stocks With Solid Net Profit Margins for Better Returns

Net profit, also referred to as the bottom line, is one of the key tools determining the financial health of an enterprise. The metric demonstrates a company’s ability to convert per-dollar sales into profits.

A low profit margin indicates higher risks, implying that a revenue drop might dampen profits, thus pushing a company into the red. GigaCloud Technology Inc. GCT, Great Lakes Dredge & Dock Corporation GLDD, Strategic Education, Inc. STRA and Teekay Tankers Ltd. TNK, however, boast solid net profit margins.

Net Profit Margin = Net profit/Sales * 100

In simple terms, net profit is the amount a company retains after deducting all costs, interest, depreciation, taxes and other expenses. In fact, net profit margin can turn out to be a potent point of reference to gauge the strength of a company’s operations and its cost-control measures.

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Also, higher net profit is essential for rewarding stakeholders. Further, strength in the metric not only attracts investors but also draws well-skilled employees who eventually enhance business value.

Moreover, a higher net profit margin compared with peers provides a company with a competitive edge.

Pros and Cons

Net profit margin helps investors gain clarity on a company’s business model in terms of pricing policy, cost structure and manufacturing efficiency. Hence, a strong net profit margin is preferred by all classes of investors.

However, net profit margin, as an investment criterion, has its share of pitfalls. The metric varies widely from industry to industry. While net income is a key metric for investment measurement in traditional industries, it is not that important for technology companies.

In addition, the difference in accounting treatment of various items — especially non-cash expenses like depreciation and stock-based compensation — makes comparison a daunting task.

Furthermore, for companies preferring to grow with debt instead of equity funding, higher interest expenses usually weigh on net profit. In such cases, the measure is rendered ineffective while analyzing a company’s performance.

The Winning Strategy

A healthy net profit margin and solid EPS growth are the two most sought-after elements in a business model.

Apart from these, we have added a few criteria to ensure maximum returns from this strategy.

Screening Parameters

Net Margin 12 months – Most Recent (%) greater than equal to 0: A high net profit margin indicates solid profitability.

Percentage Change in EPS F(0)/(F-1) greater than equal to 0: It indicates earnings growth.

Average Broker Rating (1-5) equal to 1: A rating of #1 indicates brokers’ extreme bullishness on the stock.

Zacks Rank less than or equal to 2: Stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) generally perform better than their peers in all types of market environments.

VGM Score of A or B: Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 or 2, offer the best upside potential.

Here we discuss our four picks from the 31 stocks that qualified the screen:

GigaCloud Technology is a pioneer of global end-to-end B2B e-commerce solutions for large parcel merchandise. The company's marketplace seamlessly connects manufacturers, primarily in Asia, with resellers, primarily in the United States, Asia and Europe, to execute cross-border transactions. Currently, the stock flaunts a Zacks Rank #1 and has a VGM Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for GigaCloud Technology’s 2024 earnings has been revised upward by 70 cents to $2.98 per share in the past 60 days. GCT surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 47.9%.

Great Lakes Dredge & Dock is the largest provider of dredging services in the United States, conducting business to maintain and deepen shipping channels, reclaim land from the ocean, and renourish storm-damaged coastline. The company also conducts around 25% of its operations internationally, with a strong focus on the Middle East. The stock sports a Zacks Rank of 1 at present and has a VGM Score of A.

The Zacks Consensus Estimate for Great Lakes Dredge & Dock’s 2024 earnings has been revised upward by 25.9% to 73 cents per share in the past seven days. GLDD surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 184.3%.

Strategic Education, through its subsidiaries Strayer University and New York Code and Design Academy, provides a range of post-secondary education and other academic programs in the United States. The stock flaunts a Zacks Rank of 1 at present and has a VGM Score of B.

The Zacks Consensus Estimate for Strategic Education’s 2024 earnings has been revised upward by 5 cents to $4.96 per share in the past seven days. STRA surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 36.2%.

Teekay Tankers provides international marine transportation of crude oil. The stock currently sports a Zacks Rank of 1 and has a VGM Score of B.

The Zacks Consensus Estimate for Teekay Tankers’ 2024 earnings has been revised upward by 42 cents to $14.67 per share in the past seven days. TNK surpassed the Zacks Consensus Estimate twice in the trailing four quarters, while missing the same on two occasions, the average surprise being -6.3%.

Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back testing software.

The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.

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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Disclosure: Performance information for Zacks' portfolios and strategies are available at: https://www.zacks.com/performance_disclosure/.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Strategic Education Inc. (STRA) : Free Stock Analysis Report

Great Lakes Dredge & Dock Corporation (GLDD) : Free Stock Analysis Report

Teekay Tankers Ltd. (TNK) : Free Stock Analysis Report

GigaCloud Technology Inc. (GCT) : Free Stock Analysis Report

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