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5 Efficient Stocks Potent Enough to Boost Your Returns

A portfolio built by investing in efficient companies is capable of generating profits irrespective of market conditions. Companies with favorable efficiency levels are expected to generate higher returns. Efficiency level, which seeks to measure a company's potential to convert its input into outputs, is believed to have a direct relationship with the price performance of its stock.

How to Measure Efficiency?

We have considered four popular ratios in order to find efficient companies that have the potential to provide impressive returns.

Inventory Turnover

Inventory level is one of the key indicators of a company's business health. While a high inventory level may indicate that the company is going through a rough patch in terms of sales, a dwindling level may indicate that the company will run out of stock in a favorable sales condition. This is where inventory turnover comes into play. It is the ratio of 12-month cost of goods sold (COGS) to a 4-quarter average inventory. Thus, a high value of the ratio indicates a low level of inventory relative to COGS, while a low ratio signals that the company has excess inventory.

Receivables Turnover

This ratio is used to measure a company's capability to extend its credit and collect debts on the basis of that credit. Receivables turnover ratio or the "accounts receivable turnover ratio" or the "debtor's turnover ratio" is calculated by dividing 12-month sales by four-quarter average receivables. While a high ratio indicates that the company efficiently collects its accounts receivables or has quality customers, a low ratio signals that the company has an inefficient collection procedure or has low-quality customers or an inefficient credit policy.

Asset Utilization

This is a widely used measure of a company's efficiency. Asset utilization indicates a company's potential to utilize its assets. It is a ratio of total sales over the past 12 months to the last 4-quarter average of total assets. So, the higher the ratio, the greater the chance is that the company is utilizing its assets efficiently. On the contrary, a low value of the ratio signals that it is failing to use its assets effectively.

Operating Margin

Another popular efficiency ratio is operating margin. Operating profit margin, which is simply operating income over the past 12 months divided by sales over the same period, indicates how well a company is controlling its operating expenses. If a company has a high operating profit margin in relation to its competitors, it is doing a better job at controlling operating expenses.

All these ratios can be considered as effective measures if one compares different companies within a particular sector or industry. This is the reason why we have considered only those companies that have higher ratios than their respective industry averages.

Screening Parameters

In addition to the above mentioned ratios, we have added a favorable Zacks Rank - Zacks Rank #1 (Strong Buy) or a Zacks Rank #2 (Buy) - to the screen with an objective to make this strategy more profitable.

Inventory Turnover, Receivables Turnover, Asset Utilization and Operating Margin greater than industry average

(Values of these ratios higher than industry averages may indicate that the efficiency level of the company is higher than its peers.)

Zacks Rankbetter than or equal to #2 (Buy)

(Only Zacks Rank #1 (Strong Buy) and Buy rated stocks can get through)

The use of these few criteria has narrowed down the universe of over 7,700stocks to only 12.

Here are five stocks from the 12 that made it through the screen:

OraSure Technologies, Inc.OSUR is the market leader in oral fluid diagnostics. It has an average four-quarter positive earnings surprise of more than 100%. The stock sports a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here .

Union Pacific CorporationUNP operates railroads in the U.S. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 2%.

LyondellBasell Industries N.V.LYB is a manufacturer of chemicals and derivatives. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 2.5%.

Advanced Energy Industries, Inc.AEIS is a global leader in the development and support of technologies critical to high-technology, high-growth manufacturing processes. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 12.3%.

Rollins, Inc.ROL provides pest and termite control services to residential and commercial customers. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 2.9%.

While backtesting over a two-year timeframe (Jan 16, 2015 to Jan 13, 2017), considering a four-week holding period, a portfolio following this strategy provided a total return of 14.7% compared with the S&P 500's return of 9.1%. Thus, this strategy may prove to be profitable for investors seeking healthy returns.

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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.

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Union Pacific Corporation (UNP): Free Stock Analysis Report

Rollins, Inc. (ROL): Free Stock Analysis Report

LyondellBasell Industries NV (LYB): Free Stock Analysis Report

OraSure Technologies, Inc. (OSUR): Free Stock Analysis Report

Advanced Energy Industries, Inc. (AEIS): Free Stock Analysis Report

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


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

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