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Hungry for Healthy Returns? Buy These Efficient Stocks

A portfolio comprising companies that have the ability to convert their input into output efficiently is poised to provide healthy returns irrespective of market conditions. Companies with higher efficiency levels are also believed to be financially strong and thus attract significant investor attention. Their proven track record of impressive price performance makes them more attractive investment propositions compared to those with lower efficiency levels.

Ratios to Identify an Efficient Company

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

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 may indicate that the company efficiently collects its accounts receivables or has quality customers, a low ratio may signal that the company has 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. The higher the ratio, the greater the possibility of the company utilizing its assets efficiently. On the contrary, a low ratio may signal 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 these ratios higher 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 Rankless than or equal to #2

(Only Strong Buy and Buy rated stocks can get through.)

The use of these few criteria has narrowed down the universe of over 7,700 stocks to only 16.

Here are five stocks from the 16 that made it through the screen:

Ciena CorporationCIEN is a network specialist, whose systems, software and services target and cure specific network pain points. This Zacks Rank #1 company has an average four-quarter positive earnings surprise of 12.9%.

The Sherwin-Williams CompanySHW is a manufacturer, distributor and retailer of paint, coatings and related products. It has an average four-quarter positive earnings surprise of 5.5%. The company carries a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here .

Lantheus Holdings, Inc.LNTH is involved in developing, manufacturing, selling and distributing diagnostic medical imaging agents and products. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of more than 100%.

Integrated Device Technology, Inc.IDTI designs, develops, manufactures and markets a broad range of high-performance semiconductor products and modules. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 3.9%.

Cimpress N.V.CMPR is an online supplier of graphic design and customized, printed products to businesses and consumers. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of more than 100%.

While backtesting over a two-year timeframe (Oct 10, 2014 to Oct 07, 2016), considering a four-week holding period, a portfolio following this strategy provided a total return of 26.3% compared with the S&P 500's return of 9.2%. 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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INTEGR DEVICE (IDTI): Free Stock Analysis Report

CIENA CORP (CIEN): Free Stock Analysis Report

SHERWIN WILLIAM (SHW): Free Stock Analysis Report

CIMPRESS NV (CMPR): Free Stock Analysis Report

LANTHEUS HLDGS (LNTH): 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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