Solid Net Profit Margin Makes These 4 Stocks Worth Buying

Net profit, also referred to as the bottom line, is one of the key tools determining the financial health of an enterprise. The metric demonstrates a company’s ability to convert per dollar sales into profits.

A low-profit margin indicates higher risks, implying that a revenue drop might dampen profits, pushing the company in the red. Pilgrim’s Pride Corporation PPC, Civitas Resources, Inc. CIVI, Encore Wire Corporation WIRE and A-Mark Precious Metals, Inc. AMRK boasts solid net profit margins.

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 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 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.

Screening Parameters

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 environments. 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 we discuss our four picks from the 45 stocks that qualified the screen:

Pilgrim’s Pride is engaged in the processing, production, marketing and distribution of frozen, fresh as well as value-added chicken products. The company currently sports a Zacks Rank of 1 and has a VGM Score of A.

The Zacks Consensus Estimate for Pilgrim’s Pride’s 2022 earnings has been revised upward to $2.65 from $2.55 in the past 30 days. PPC surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while missing the same on one occasion, the average surprise being 24.9%.

Civitas Resources is a carbon-neutral oil & gas producer and is focused on developing and producing crude oil, natural gas and natural gas liquids principally in Colorado's Denver-Julesburg Basin. At present, the stock has a Zacks Rank #1 and a VGM Score of A.

The Zacks Consensus Estimate of $13.53 for Civitas Resources’ current-year earnings has moved 15.3% north in the past 30 days. CIVI surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while missing the same on one occasion, the average surprise being 95.2%.

Encore Wire is a low-cost manufacturer of copper electrical building wire and cable. The company is a significant supplier of both residential wire for interior electrical wiring in homes, apartments and manufactured housing, as well as building wire for electrical distribution in commercial and industrial buildings. Encore Wire sports a Zacks Rank of 1, at present, and has a VGM Score of A.

The Zacks Consensus Estimate for Encore Wire’s 2022 earnings has been revised upward to $10.74 from $9.76 in seven days. WIRE surpassed the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 298.1%.

A-Mark Precious Metals operates as a full-service precious metals trading company offering a wide array of products and services. A-Mark Precious Metals currently flaunts a Zacks Rank #1 and has a VGM Score of A.

The Zacks Consensus Estimate of $7.93 for A-Mark Precious Metals’ fiscal 2022 earnings has moved 31% north in the past 30 days. AMRK surpassed the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 99.5%.

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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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