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Top 5 Stocks with Impressive Net Profit Margin

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The primary motive of any investment is to generate profit. Investors pour money into businesses and companies in the hope of multiplying returns. Profits are used to reward shareholders and can be reinvested for expanding the business.

Net Profit Margin = Net profit /Sales * 100.

Net profit of a business is the amount that remains in the last line (also known as bottom line) of the income statement after all costs (including taxes) have been deducted from revenues.

In fact, net profit margin can turn out to be a powerful tool to measure how efficiently a company is running its business and controlling its costs. Moreover, a higher net profit margin as compared to peers lends a competitive advantage.

Further, a higher net profit margin attracts not only new investors but also well-skilled employees that eventually increase the value of the business.

Pros and Cons

Net profit margin helps investors to understand a company’s business model in terms of pricing policy, cost structure and manufacturing efficiency. Hence, a healthy net profit margin is preferred by all kinds of investors.

However, net profit margin has a number of drawbacks that limit its scope as an effective analytical tool. Its calculation varies widely from industry to industry. Difference in accounting treatment of various items – especially non-cash expenses like depreciation and stock-based compensation – makes it a difficult metric for the purpose of comparison.

Further, for companies preferring to grow with debt, instead of equity funding, higher interest expense usually drags down the net profit. In such cases, it is not an effective tool to analyze the company’s performance.

The Winning Strategy

Healthy net profit margin and solid EPS growth are two of the most sought after ingredients in a business model.

Apart from these two metrics, we have added a few other criteria to ensure maximum possible return 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 growth prospects of the stock.

Zacks Rank equal to 1: Only Strong Buy stocks are allowed. In good markets or bad, stocks with a Zacks Rank of #1 (Strong Buy) continue to outperform.

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 (Buy) offer the best upside potential.

Here are five of the seven stocks that qualified the screen:

West Orange, NJ-based Lincoln Educational Services Corporation (LINC - Free Report) provides career-oriented post-secondary education to recent high school graduates and working adults. The company operates 31 schools in 15 states. The stock has a VGM score of ‘A’. Moreover, the Zacks Consensus Estimate for 2016 has narrowed by 7 cents to a loss of 3 cents over the last 7 days.

El Segundo, CA-based Stamps.com Inc provides Internet-based services for mailing or shipping letters, packages or parcels anywhere in the U.S. The stock has a VGM score of ‘B’. Meanwhile, the Zacks Consensus Estimate for 2016 has surged 80 cents (17.2%) to $5.45 per share over the last 30 days.

Gibraltar Industries Inc. (ROCK - Free Report) manufactures and distributes products to the industrial and buildings market. The company has its headquarters in Buffalo, NY. The stock has a VGM score of ‘A’. Meanwhile, the Zacks Consensus Estimate for 2016 has increased by 6 cents to $1.44 per share over the last 30 days.

Illinois-based Global Brass and Copper Holdings Inc. is a converter, fabricator, processor and distributor of specialized non-ferrous products, including a wide range of sheet, strip, foil, rod, tube, and fabricated metal component products. The stock has a VGM score of ‘A’. Moreover, the Zacks Consensus Estimate for 2016 has remained steady at $2.15 over the last 30 days.

Colorado-based Innospec Inc. (IOSP - Free Report) develops, manufactures, blends, markets and supplies fuel additives, oilfield chemicals, personal care and other specialty chemicals. The stock has a VGM score of ‘B’. Moreover, the Zacks Consensus Estimate for 2016 has surged 15 cents (4.1%) at $3.80 over the last 7 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.

Disclosure: Performance information for Zacks' portfolios and strategies are available at:https://www.zacks.com/performance.

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Lincoln Educational Services Corporation (LINC) - free report >>

Gibraltar Industries, Inc. (ROCK) - free report >>

Innospec Inc. (IOSP) - free report >>

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