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Hungry for Healthy Returns? Buy These Efficient Stocks
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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 Corporation (CIEN - Free Report) 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 Company (SHW - Free Report) 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 - Free Report) 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. 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 - Free Report) 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.
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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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 Corporation (CIEN - Free Report) 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 Company (SHW - Free Report) 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 - Free Report) 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. 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 - Free Report) 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.
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 »