Investing 101: Rallying Stocks With Solid Profitability

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(List compiled by Eben Esterhuizen, CFA)

Looking for momentum ideas with solid sources of profitability? To create this list, we started with a universe of rallying stocks, and then identified which of them have encouraging DuPont equation profitability breakdowns. 

Haven't heard of these terms? No need to worry, here's an explanation of the key terms needed to understand our screen:

Rallying

When a stock is rallying it means it is performing above its moving average for a given time period. It is presented as a % of performance relative to the average. When a stock is performing above its 20-day moving average (MA) as well as its 50 and 200 day moving averages, it signals bullish momentum. All the stocks in this list are rallying above their 20, 50, and 200-day MA.

The DuPont Equation:

Return on Equity (ROE) is a widely-used profitability measure. In general, the higher the ROE the more profitable the company appears. The problem with this is that profitability can come from many sources – some better than others.

In the 1920s, the DuPont Corporation developed a useful equation that breaks down ROE into three components. 

ROE = Net Profit Margin  x  Asset Efficiency  x  Financial Leverage 

Net profit margin reflects cost structure, asset efficiency reflects productivity, and financial leverage is use of debt. Increases in any of the three can contribute to increased ROE.

In general, an encouraging DuPont breakdown implies one or more of the following:

- Improving Net Profit Margin, i.e. rising Net Income/ Revenues
- Improving Asset Efficiency, i.e. rising Sales/Assets
- Decreasing Financial Leverage ratio, i.e. declining Assets/Equity

In other words, it is preferable for ROE to rise because of higher net profit margins or asset efficiency. Increasing financial leverage, which would increase ROE, is not always a positive development for a company.

Now that you're familiar with the terms discussed, let's move on to the results of our screen.

Use this list as a starting point for your own analysis.

Analyze These Ideas (Tools Will Open In A New Window)

1. Access a thorough description of all companies mentioned
2. Compare analyst ratings for all stocks mentioned below
3. Visualize annual returns for all stocks mentioned

1. QEP Co. Inc. (QEPC): Distributes a range of hardwood flooring, flooring installation tools, adhesives, and flooring related products targeted for the professional installation and do-it-yourself markets. The stock is currently trading 1.69% above its SMA20, 6.16% above its SMA50, and 30.34% above its SMA200. MRQ net profit margin at 4.02% vs. 3.28% y/y. MRQ sales/assets at 0.764 vs. 0.7 y/y. MRQ assets/equity at 2.067 vs. 3.027 y/y.

2. Carriage Services Inc. (CSV): Provides death care services and merchandise in the United States. The stock is currently trading 1.35% above its SMA20, 5.21% above its SMA50, and 6.37% above its SMA200. MRQ net profit margin at 5.43% vs. 5.17% y/y. MRQ sales/assets at 0.071 vs. 0.07 y/y. MRQ assets/equity at 5.367 vs. 5.558 y/y.

3. REX American Resources Corporation (REX): Engages in the production and sale of ethanol and distillers grains. The stock is currently trading 3.45% above its SMA20, 3.37% above its SMA50, and 4.86% above its SMA200. MRQ net profit margin at 3.18% vs. 1.89% y/y. MRQ sales/assets at 0.2 vs. 0.149 y/y. MRQ assets/equity at 1.482 vs. 1.745 y/y.

4. Renaissance Learning Inc. (RLRN): Provides computer-based assessment and periodic progress monitoring technology for pre-kindergarten through senior high schools and districts in the United States and internationally. The stock is currently trading 6.11% above its SMA20, 15.14% above its SMA50, and 38.29% above its SMA200. MRQ net profit margin at 14.87% vs. 13.85% y/y. MRQ sales/assets at 0.626 vs. 0.359 y/y. MRQ assets/equity at -2.026 vs. 6.065 y/y.

5. JAKKS Pacific, Inc. (JAKK): Designs, produces, markets, and distributes toys and consumer products worldwide. The stock is currently trading 0.22% above its SMA20, 7.92% above its SMA50, and 1.38% above its SMA200. MRQ net profit margin at 3.21% vs. 2.42% y/y. MRQ sales/assets at 0.215 vs. 0.205 y/y. MRQ assets/equity at 1.528 vs. 1.619 y/y.

6. Generac Holdings Inc. (GNRC): The stock is currently trading 3.28% above its SMA20, 1.74% above its SMA50, and 3.69% above its SMA200. MRQ net profit margin at 9.48% vs. 9.13% y/y. MRQ sales/assets at 0.133 vs. 0.114 y/y. MRQ assets/equity at 2.619 vs. 3.105 y/y.

7. Thoratec Corp. (THOR): Develops, manufactures, and markets proprietary medical devices used for circulatory support. The stock is currently trading 1.49% above its SMA20, 0.15% above its SMA50, and 6.81% above its SMA200. MRQ net profit margin at 19.58% vs. 16.78% y/y. MRQ sales/assets at 0.167 vs. 0.118 y/y. MRQ assets/equity at 1.105 vs. 1.382 y/y.

8. Hexcel Corp. (HXL): Engages in the development, manufacture, and marketing of composites for use in the commercial aerospace, space and defense, and industrial applications. The stock is currently trading 4.09% above its SMA20, 3.54% above its SMA50, and 9.28% above its SMA200. MRQ net profit margin at 10.57% vs. 7.57% y/y. MRQ sales/assets at 0.268 vs. 0.247 y/y. MRQ assets/equity at 1.699 vs. 2.118 y/y.

9. ITC Holdings Corp. (ITC): Engages in the transmission of electricity in the United States. The stock is currently trading 1.68% above its SMA20, 4.72% above its SMA50, and 10.97% above its SMA200. MRQ net profit margin at 23.23% vs. 21.55% y/y. MRQ sales/assets at 0.041 vs. 0.04 y/y. MRQ assets/equity at 3.818 vs. 3.959 y/y.

10. Southern Company (SO): Operates as a utility company that provides electric service in the southeastern United States. The stock is currently trading 0.53% above its SMA20, 3.47% above its SMA50, and 9.21% above its SMA200. MRQ net profit margin at 13.71% vs. 12.51% y/y. MRQ sales/assets at 0.081 vs. 0.079 y/y. MRQ assets/equity at 3.101 vs. 3.212 y/y.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks


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