Bet on These Top 5 Stocks With Stellar Net Profit Margins
Investors eye businesses that generate profits on a regular basis. In order to gauge the extent of profits, there is no better metric than the net profit margin.
A higher net margin underlines a company’s efficiency to translate sales into actual profits. Moreover, this metric lends an insight into how well a company is run and the headwinds weighing on it.
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.
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 a business’ value.
Moreover, a higher net profit margin compared with its peers provides the company 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 own 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.
Net Margin 12 months – Most Recent (%) greater than equal to 0: 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 environment. You can see the complete list of today’s Zacks #1 Rank stocks here.
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 are five of the 12 stocks that qualified the screen:
Griffon Corporation GFF is a diversified management and holding company conducting business through wholly-owned subsidiaries. Currently, the stock sports a Zacks Rank of #1 and has a VGM Score of A. The Zacks Consensus Estimate for fiscal 2020 earnings has been revised upward by 25.6% to $1.08 in 30 days’ time.
Systemax Inc. SYX is a direct marketer of brand name and private label products, including personal desktop computers, notebook computers, computer related products, and industrial products, in North America and Europe. At present, the stock flaunts a Zacks Rank of #1 and has a VGM Score of B. The Zacks Consensus Estimate for current-year earnings has moved 21.8% north to $1.34 in seven days’ time.
Carriage Services, Inc. CSV is a leading provider of death-care services and products in the United States. The stock currently carries a Zacks Rank of 2 and has a VGM Score of B. The Zacks Consensus Estimate of $1.40 for the ongoing year’s earnings has moved up 15 cents over the past week.
Progress Software Corporation PRGS offers the leading platform for developing and deploying mission-critical business applications. Currently, the stock holds a Zacks Rank of #2 and has a VGM Score of B. The Zacks Consensus Estimate for fiscal 2020 earnings has been revised upward by 6 cents to $2.86 in 60 days’ time.
Turning Point Brands, Inc. TPB provides tobacco products. The company's product consists of moist snuff, loose leaf chewing tobacco, cigarette papers, make-your-own cigar wraps and cigar smoking tobacco, cigars and liquid and tobacco vapor. At present, the stock carries a Zacks Rank 2 and has a VGM Score of B. The Zacks Consensus Estimate of $2.08 for 2020 earnings moved 10.1% north over the past 30 days.
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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.
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Systemax Inc. (SYX): Free Stock Analysis Report
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Griffon Corporation (GFF): Free Stock Analysis Report
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