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Buy These 5 Efficient Stocks for Big Upside Potential
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Companies with favorable efficiency levels typically 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. A portfolio that has been built up by investing in efficient companies may thus prove to be profitable irrespective of market conditions.
Popular Efficiency Measures
It is important for one to identify ideal ratios that can measure a company’s efficiency level. With this objective, we have considered four popular efficiency ratios to select efficient companies.
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 it has quality customers, a low ratio may signal that the company has an inefficient collection procedure or 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 possibility is that the company is utilizing its assets efficiently. On the contrary, a low value of the 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.)
These few criteria have narrowed down the universe of over 7,700stocks to only 15.
Here are five from the list:
Tallgrass Energy GP, LP engaged in the transportation, storage and processing of natural gas, the transportation of crude oil and the provision of water business services. This Zacks Rank #1 company has an average four-quarter positive earnings surprise of 82.6%.
Baxter International Inc. (BAX - Free Report) engages in the worldwide development, manufacture and distribution of a diversified line of products, systems and services used primarily in the health-care field. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 31.6%.
AO Smith Corp. (AOS - Free Report) is one of the world's leading manufacturers and marketers of residential and commercial water heating equipment, offering a comprehensive line featuring the best- known brands in the industry. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 6.3%.
Southwestern Energy Company (SWN - Free Report) is an energy company primarily focused on natural gas and oil exploration, development and production. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 65.4%.
Rollins Inc. (ROL - Free Report) is involved in providing services including termite and pest control, protective services, lawn care and plantscaping to both residential and commercial customers. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 1.8%.
While backtesting over a two-year timeframe (July 18, 2014 to July 15, 2016), considering a four-week holding period, a portfolio following this strategy provided a total return of 16.3% compared with the S&P 500’s return of 7.4%.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back-testing software.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »
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Buy These 5 Efficient Stocks for Big Upside Potential
Companies with favorable efficiency levels typically 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. A portfolio that has been built up by investing in efficient companies may thus prove to be profitable irrespective of market conditions.
Popular Efficiency Measures
It is important for one to identify ideal ratios that can measure a company’s efficiency level. With this objective, we have considered four popular efficiency ratios to select efficient companies.
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 it has quality customers, a low ratio may signal that the company has an inefficient collection procedure or 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 possibility is that the company is utilizing its assets efficiently. On the contrary, a low value of the 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.)
These few criteria have narrowed down the universe of over 7,700stocks to only 15.
Here are five from the list:
Tallgrass Energy GP, LP engaged in the transportation, storage and processing of natural gas, the transportation of crude oil and the provision of water business services. This Zacks Rank #1 company has an average four-quarter positive earnings surprise of 82.6%.
Baxter International Inc. (BAX - Free Report) engages in the worldwide development, manufacture and distribution of a diversified line of products, systems and services used primarily in the health-care field. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 31.6%.
AO Smith Corp. (AOS - Free Report) is one of the world's leading manufacturers and marketers of residential and commercial water heating equipment, offering a comprehensive line featuring the best- known brands in the industry. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 6.3%.
Southwestern Energy Company (SWN - Free Report) is an energy company primarily focused on natural gas and oil exploration, development and production. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 65.4%.
Rollins Inc. (ROL - Free Report) is involved in providing services including termite and pest control, protective services, lawn care and plantscaping to both residential and commercial customers. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 1.8%.
While backtesting over a two-year timeframe (July 18, 2014 to July 15, 2016), considering a four-week holding period, a portfolio following this strategy provided a total return of 16.3% compared with the S&P 500’s return of 7.4%.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back-testing software.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »