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Top 5 Stocks with Solid Net Profit Margin

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Net profit margin is the most important entry in an income statement, as it demonstrates the affluence of a company. It determines the efficiency of a company in deploying its resources, making it the best metric to measure a company’s profitability.  

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 in a company operations and cost-control measures.

Higher net profit is indispensable for rewarding stakeholders. Also, strength in the metric not only attracts new investors but also draws well-skilled employees that eventually add to the value of the business.

Moreover, a higher net profit margin as compared to peers lends 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.

Moreover, the difference in accounting treatment of various items – especially non-cash expenses like depreciation and stock-based compensation – makes comparison a complex task.

Further, for companies preferring to grow with debt, instead of equity funding, higher interest expenses usually weigh on the net profit. In such cases, the measure is rendered ineffective to analyze a company’s performance.

The Winning Strategy

A healthy net profit margin and solid EPS growth are two most sought-after elements in a business model.

Apart from these, we have added a few other 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 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. 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 (Buy) offer the best upside potential.

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

Rockville, MD-based Argan Inc. (AGX - Free Report) provides inside premise wiring services to the federal government. The company also offers underground and aerial construction services and splicing to major telecommunications and utilities customers. The stock has a VGM score of ‘A’. Moreover, the Zacks Consensus Estimate for 2016 has increased by 25 cents (7.8%) at $3.45 over the last 30 days.

Denver, CO-based Hallador Energy Company is engaged in the production and sale of steam coal used for power generation. The company has a VGM Score of ‘A’. Its earnings estimate for the current year has remained steady at 59 cents over the last 30 days.

Irvine, CA-based Autobytel Inc provides automotive marketing services that connect automotive retail dealers, manufacturers and consumers. The stock has a VGM score of ‘B’. Moreover, the Zacks Consensus Estimate for 2016 has remained steady at $1.09 over the last 30 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 remained steady at $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 at Buffalo, NY. The stock has a VGM score of ‘B’. Meanwhile, the Zacks Consensus Estimate for 2016 has remained steady at $1.44 per share over the last 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.

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

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