Yahoo Finance Rely on DuPont to Buy 5 Top-Ranked Healthy Stocks
Return on equity (ROE) is one of the most favored metrics of investors. It is a profitability ratio that measures earnings generated by a company from its equity. Investors can follow the ROE trend in companies and compare this to historical or industry benchmarks to pick a winning stock.
However, stepping beyond the basic ROE and analyzing it at an advanced level could lead to even better returns. Here is where the DuPont analysis comes into play.It is an analytical method, which examines three major elements – operating management, management of assets and the capital structure – related to the financial condition of a company. Below we show how DuPont breaks down ROE into its different components:
ROE = Net Income/Equity
Net Income / Equity = (Net Income / Sales) * (Sales / Assets) * (Assets / Equity)
ROE = Profit Margin * Asset Turnover Ratio * Equity Multiplier
In this regard, investors can bet on the likes of National Beverage FIZZ, Sprouts Farmers Market SFM, Veritiv VRTV, EMCOR Group EME and Hudson Global HSON.
Why Use DuPont?
Although one cannot brush off the importance of normal ROE calculation, the fact remains that it doesn’t always portray a complete picture. The DuPont analysis, on the other hand, allows investors to assess the elements that play a dominant role in any change in ROE. It can help investors to segregate companies with higher margins from those having a high turnover. For example, high-end fashion brands generally survive on high margins as compared with retail goods, which rely on a higher turnover.
And one of the ROE components — equity multiplier (explained below) — can help you judge how burdened a company is with debts. A lofty ROE could be due to the overuse of debt. Thus, the strength of a company can be misleading if it has a high debt load.
So, an investor confined solely to an ROE perspective may be confused if he or she has to judge between two stocks of equal ratio. This is where DuPont analysis wins over and spots the better stock.
Investors can simply do this analysis by taking a look at a company’s financials. However, looking at the financial statements of each company separately can be a tedious task. Screening tools like Zacks Research Wizard can come to your rescue and help you shortlist the stocks that look impressive with a DuPont analysis.
Screening Parameters
• Profit Margin more than or equal to 3: As the name suggests, it is a measure of how profitably the business is running. Generally, it is the key contributor to ROE.
• Asset Turnover Ratio more than or equal to 2: It allows an investor to assess management’s efficiency in using assets to drive sales.
• Equity Multiplier between 1 and 3: It’s an indication of how much debt the company uses to finance its assets.
• Zacks Rank less than or equal to 2: Stocks having a Zacks Rank #1 (Strong Buy) or 2 (Buy) generally perform better than their peers in all types of market environment.
• Current Price more than $5: This screens out the low priced stocks. However, when looking for lower priced stocks, this criterion can be removed.
Here are five of the six stocks that made it through the screen:
National Beverage (FIZZ): This Zacks Rank #1 company is a holding company for various subsidiaries that develop, manufacture, market and distribute a complete portfolio of quality beverage products throughout the United States. You can see the complete list of today’s Zacks #1 Rank stocks here.
The average earnings surprise of FIZZ for the past four quarters is 0.72%.
Sprouts Farmers Market (SFM): The Zacks Rank #2 company operates in a highly fragmented grocery store industry, and has a unique model that features fresh produce, a foods section, and a vitamin department focused on overall wellness.
The average earnings surprise of SFM for the past four quarters is 12.54%.
Veritiv VRTV: The Zacks Rank #1 company engages in offering North American business-to-business distribution solutions. It provides packaging, print and print management, publishing, supply chain, facility and logistics solutions that span the entire lifecycle of core business operations.
The average earnings surprise of VRTV for the past four quarters is 20.69%.
EMCOR Group (EME): This Zacks Rank #2 company is one of the leading providers of mechanical and electrical construction, industrial and energy infrastructure, as well as building services for a diverse range of businesses.
The average earnings surprise of EME for the past four quarters is 5.49%.
Hudson Global (HSON): The company provides recruitment and related talent solutions worldwide. The company has a Zacks Rank #2.
The average earnings surprise of HSON for the past four quarters is 120.29%.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
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.
Click here to sign up for a free trial to the Research Wizard today.
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.
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EMCOR Group, Inc. (EME) : Free Stock Analysis Report
National Beverage Corp. (FIZZ) : Free Stock Analysis Report
Sprouts Farmers Market, Inc. (SFM) : Free Stock Analysis Report
Hudson Global, Inc. (HSON) : Free Stock Analysis Report
Veritiv Corporation (VRTV) : Free Stock Analysis Report
