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Delve Into DuPont Analysis & Pick 5 Top Stocks

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In a market where complacency levels may falter any time thanks to central banks’ moves, spread of the new COVID-19 variant and overvaluation issues, picking the right stock is a challenge. The metric return on equity goes a long way in resolving this issue.

Sanderson Farms Inc. , Pool Corp. (POOL - Free Report) , Asbury Automotive Group (ABG - Free Report) , Expeditors International of Washington (EXPD - Free Report) and Robert Half International (RHI - Free Report) are some of the companies that win on these criteria.

The metric enables investors to differentiate between a profit-churner and a profit-burner. It is a profitability ratio that measures the earnings that a company generates from its equity. But to fine-tune this basic concept, one can land on DuPont analysis. This theory will take investors a step higher and better pick some quality stocks. 

Here is how DuPont breaks down ROE into its different components:

ROE = Net Income/Equity

Net Income / Equity = (Net Income / Sales) * (Sales / Assets) * (Assets / Equity)

ROE = Profit Margin * Asset Turnover Ratio * Equity Multiplier

Why Use DuPont?

Although one can’t play down the importance of normal ROE calculation, the fact remains that it doesn’t always provide a complete picture. The DuPont analysis, on the other hand, allows investors to assess the elements that play a dominant role in any change in ROE. It can help investors to segregate companies having higher margins from those having high turnover. For example, high-end fashion brands generally survive on high margin as compared with retail goods, which rely on higher turnover.

In fact, it also sheds light on the company’s leverage status, which can go a long way in selecting stocks poised for gains. A lofty ROE could be due to the overuse of debt. Thus, the strength of a company can be misleading if it has a high debt load.

So, an investor confined solely to an ROE perspective may be confused if he or she has to judge between two stocks of equal ratio. This is where DuPont analysis wins over and spots the better stock.

Investors can simply do this analysis by taking a look at the company’s financials.However, looking at financial statements of each company separately can be a tedious task. Screening tools like Zacks Research Wizard can come to your rescue and help you shortlist the stocks that look impressive with a DuPont analysis.

Screening Parameters

Profit Margin more than or equal to 3: As the name suggests, it is a measure of how profitably the business is running. Generally, it is the key contributor to ROE.

Asset Turnover Ratio more than or equal to 2: It allows an investor to assess management’s efficiency in using assets to drive sales.

Equity Multiplier between 1 and 3: It’s an indication of how much debt the company uses to finance its assets.

Zacks Rank less than or equal to 2: Stocks having a Zacks Rank #1 (Strong Buy) or 2 (Buy) generally perform better than their peers in all types of market environment.

Current Price more than $5: This screens out the low priced stocks. However, when looking for lower priced stocks, this criterion can be removed.

Here are five of 17 stocks that made it through the screen:

Sanderson Farms Inc. : This Zacks Rank #1 Sanderson Farms is a poultry processing company that operates 11 hatcheries, 9 feed mills and 12 processing plants, and 1 prepared chicken plant. You can see the complete list of today’s Zacks #1 Rank stocks here.

Plus, Sanderson Farms sells ice pack, chill pack, bulk pack and frozen chicken, in whole, cut-up and boneless form, primarily under the Sanderson Farms brand name to retailers, distributors, casual dining operators and to customers who resell frozen chicken into export markets. The last four-quarter earnings surprise of SAFM is as high as 496.29%.

Pool Corp. (POOL - Free Report) : This Zacks Rank #1 company is the world's largest wholesale distributor of swimming pool supplies, equipment and related products.

Pool is a leading regional wholesale distributor of irrigation and landscape products. The last four-quarter earnings surprise of POOL is 56.29%.

Asbury Automotive Group (ABG - Free Report) : Zacks Rank #1 Asbury Automotive is one of the largest automotive retailers.

Asbury Automotive also sells used vehicles at all franchised dealership locations and stand-alone stores. The last four-quarter earnings surprise of ABG is 24.33%.

Expeditors International of Washington (EXPD - Free Report) : This Zacks Rank #1 company is a leading third-party logistics provider. EXPD is engaged in the business of global logistics management, including international freight forwarding and consolidation, for both air and ocean freight.

The last four-quarter earnings surprise of Expeditors International of Washington is 29.14%.

Robert Half International (RHI - Free Report) : Zacks Rank #1 Robert Half is one of the world's largest providers of professional consulting and staffing services.

Robert Half’s specialized staffing divisions include Accountemps, Robert Half Finance & Accounting and Robert Half Management Resources — for temporary, full-time and senior-level project professionals, respectively, in the fields of accounting and finance. The last four-quarter earnings surprise of RHI is 20.50%.

You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.

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: