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Profitability analysis is generally used to assess a company’s pricing strategies. Here, we have used profitability analysis to assess a company’s ability to generate strong returns after meeting all its business expenses.
Although a company with stable profitability and weak fundamentals may fail to provide satisfactory results, studies show that a profitable company might turn out to be an effective investment option for return-seeking investors.
The best way to measure a company’s profitability is by using ratio analysis. Profitability ratios are basically of three types, gross income ratio, operating income ratio and net income ratio. From these, we have chosen the most transparent and widely used one – the net income ratio.
Net Income Ratio
Net income ratio gives us the exact profit level of a company. It reflects the percentage of net income to total sales revenue. Using net income ratio, one can determine a company’s capability to clear all its operating and non-operating expenses from its sales revenue. A higher net income ratio usually implies a company’s ability to generate ample sales revenue and successfully manage all its business functions.
Screening Parameters
Net income ratio is not the only indicator of future winners. So, we have added a few more criteria to arrive at a winning strategy.
Zacks Rank equal to #1: Only Zacks Rank #1 (Strong Buy) stocks are allowed. With the Zacks Rank proving itself to be one of the best rating systems out there, this is a great way to start things off. You can see the complete list of today’s Zacks #1 Rank stocks here.
12-Month Trailing Sales and Net Income Growth Higher than X Industry: Stocks that possess higher sales and net income growth in the last 12 months showcase better financial performance.
12-Month Trailing Net Income Ratio Higher than X Industry: High net income ratio indicates a company’s solid profitability.
% Rating Strong Buy greater than 70%: This indicates that 70% of the analysts covering these stocks are optimistic.
Here are five of the seven stocks that qualified the screening:
Calavo Growers, Inc. (CVGW - Free Report) engages in the procurement and marketing of avocados and other perishable foods along with the preparation and distribution of processed avocado products.It has an average four-quarter earnings surprise of 11.8%.
Cytokinetics, Incorporated (CYTK - Free Report) is a late-stage biopharmaceutical company focused on discovering, developing and commercializing first-in-class muscle activators as potential treatments for debilitating diseases.It has an average four-quarter earnings surprise of more than 100%.
Sucampo Pharmaceuticals, Inc. is an emerging pharmaceutical company focused on the discovery, development and commercialization of proprietary drugs based on prostones. It has an average four-quarter earnings surprise of 35.6%.
State National Companies, Inc. is a specialty provider of property and casualty insurance.It has an average four-quarter earnings surprise of 21.3%.
CryoLife Inc. aims to manufacture and distribute medical devices globally.It has an average four-quarter earnings surprise of over 300%.
While backtesting over a two-year timeframe (Dec 19, 2014 to Dec 16, 2016), a portfolio following this strategy provided a total return of 30.2% compared with the S&P 500’s return of 7.4%. Thus, this strategy may prove profitable for those looking to beat the market.
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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5 Profitable Stocks to Buy for Great Returns
Profitability analysis is generally used to assess a company’s pricing strategies. Here, we have used profitability analysis to assess a company’s ability to generate strong returns after meeting all its business expenses.
Although a company with stable profitability and weak fundamentals may fail to provide satisfactory results, studies show that a profitable company might turn out to be an effective investment option for return-seeking investors.
The best way to measure a company’s profitability is by using ratio analysis. Profitability ratios are basically of three types, gross income ratio, operating income ratio and net income ratio. From these, we have chosen the most transparent and widely used one – the net income ratio.
Net Income Ratio
Net income ratio gives us the exact profit level of a company. It reflects the percentage of net income to total sales revenue. Using net income ratio, one can determine a company’s capability to clear all its operating and non-operating expenses from its sales revenue. A higher net income ratio usually implies a company’s ability to generate ample sales revenue and successfully manage all its business functions.
Screening Parameters
Net income ratio is not the only indicator of future winners. So, we have added a few more criteria to arrive at a winning strategy.
Zacks Rank equal to #1: Only Zacks Rank #1 (Strong Buy) stocks are allowed. With the Zacks Rank proving itself to be one of the best rating systems out there, this is a great way to start things off. You can see the complete list of today’s Zacks #1 Rank stocks here.
12-Month Trailing Sales and Net Income Growth Higher than X Industry: Stocks that possess higher sales and net income growth in the last 12 months showcase better financial performance.
12-Month Trailing Net Income Ratio Higher than X Industry: High net income ratio indicates a company’s solid profitability.
% Rating Strong Buy greater than 70%: This indicates that 70% of the analysts covering these stocks are optimistic.
Here are five of the seven stocks that qualified the screening:
Calavo Growers, Inc. (CVGW - Free Report) engages in the procurement and marketing of avocados and other perishable foods along with the preparation and distribution of processed avocado products.It has an average four-quarter earnings surprise of 11.8%.
Cytokinetics, Incorporated (CYTK - Free Report) is a late-stage biopharmaceutical company focused on discovering, developing and commercializing first-in-class muscle activators as potential treatments for debilitating diseases.It has an average four-quarter earnings surprise of more than 100%.
Sucampo Pharmaceuticals, Inc. is an emerging pharmaceutical company focused on the discovery, development and commercialization of proprietary drugs based on prostones. It has an average four-quarter earnings surprise of 35.6%.
State National Companies, Inc. is a specialty provider of property and casualty insurance.It has an average four-quarter earnings surprise of 21.3%.
CryoLife Inc. aims to manufacture and distribute medical devices globally.It has an average four-quarter earnings surprise of over 300%.
While backtesting over a two-year timeframe (Dec 19, 2014 to Dec 16, 2016), a portfolio following this strategy provided a total return of 30.2% compared with the S&P 500’s return of 7.4%. Thus, this strategy may prove profitable for those looking to beat the market.
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 »