We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
With the global markets on a volatile ride thanks to inflationary pressures and rising rate worries in the United States, looking for quality stocks is investors’ natural choice.
There are plenty of criteria or metrics that can lead investors to quality stocks. Among these return on equity (ROE) is one of the most coveted ones. That said, we would like to note that the basic ROE calculation doesn’t always tell the complete story and an investor might get misled by picking stocks based on this number.
Thus, taking a step beyond the basic ROE and analyzing it at an advanced level or applying the DuPont technique seems to be an intriguing idea. MEDIFAST(MED - Free Report) , Pool Corp. (POOL - Free Report) , Builders FirstSource (BLDR - Free Report) , Boise Cascade (BCC - Free Report) and Robert Half International (RHI - Free Report) are some stocks that fit this investment strategy.
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)
The DuPont analysis allows investors to evaluate the elements that are the driving factors in any change in ROE. It can help investors to separate companies having higher margins from those having a high turnover. In fact, it also focuses on the company’s leverage status. A lofty ROE could be due to the overuse of debt. If this is the case, the strength of a company can be uncertain if it has a high debt load.
So, an investor relying solely on basic ROE may be confused if he or she has to judge between two stocks of equal ratio. This is where DuPont analysis wins while finding out the better stock.
Investors can simply do this analysis by taking a look at the company’s financials. However, looking at the 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 the 17 stocks that made it through the screen:
The average earnings surprise for the trailing four quarters of MED is 17.28%.
Pool Corp. (POOL - Free Report) : The company is the world's largest wholesale distributor of swimming pool supplies, equipment and related products. The stock carries a Zacks Rank #2.
The average earnings surprise for POOL in the trailing four quarters is 56.29%.
Builders FirstSource (BLDR - Free Report) : The Zacks Rank #1 company is the largest supplier of building materials, manufactured components and construction services to professional homebuilders, sub-contractors, remodelers and consumers. Builders FirstSourcerecently completed its merger with BMC Stock Holdings, Inc.
The average earnings surprise for BLDR in the trailing four quarters is 71.45%.
Boise Cascade (BCC - Free Report) :The Zacks Rank #2 company operates as a wood products manufacturer and building materials distributor.
The average earnings surprise for BCC in the trailing four quarters is 45.46%.
Robert Half International (RHI - Free Report) : Robert Half is one of the world's largest providers of professional consulting and staffing services. The company sports a Zacks Rank #1.
The average earnings surprise for RHI in the trailing four quarters is 19.49%.
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.
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.
Image: Bigstock
5 Quality Stocks Backed by DuPont Analysis
With the global markets on a volatile ride thanks to inflationary pressures and rising rate worries in the United States, looking for quality stocks is investors’ natural choice.
There are plenty of criteria or metrics that can lead investors to quality stocks. Among these return on equity (ROE) is one of the most coveted ones. That said, we would like to note that the basic ROE calculation doesn’t always tell the complete story and an investor might get misled by picking stocks based on this number.
Thus, taking a step beyond the basic ROE and analyzing it at an advanced level or applying the DuPont technique seems to be an intriguing idea. MEDIFAST(MED - Free Report) , Pool Corp. (POOL - Free Report) , Builders FirstSource (BLDR - Free Report) , Boise Cascade (BCC - Free Report) and Robert Half International (RHI - Free Report) are some stocks that fit this investment strategy.
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
Inside the Strength of DuPont
The DuPont analysis allows investors to evaluate the elements that are the driving factors in any change in ROE. It can help investors to separate companies having higher margins from those having a high turnover. In fact, it also focuses on the company’s leverage status. A lofty ROE could be due to the overuse of debt. If this is the case, the strength of a company can be uncertain if it has a high debt load.
So, an investor relying solely on basic ROE may be confused if he or she has to judge between two stocks of equal ratio. This is where DuPont analysis wins while finding out the better stock.
Investors can simply do this analysis by taking a look at the company’s financials. However, looking at the 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 the 17 stocks that made it through the screen:
MEDIFAST (MED - Free Report) : This Zacks Rank #2 company is engaged in direct-selling in the health and wellness industry. You can see the complete list of today’s Zacks #1 Rank stocks here.
The average earnings surprise for the trailing four quarters of MED is 17.28%.
Pool Corp. (POOL - Free Report) : The company is the world's largest wholesale distributor of swimming pool supplies, equipment and related products. The stock carries a Zacks Rank #2.
The average earnings surprise for POOL in the trailing four quarters is 56.29%.
Builders FirstSource (BLDR - Free Report) : The Zacks Rank #1 company is the largest supplier of building materials, manufactured components and construction services to professional homebuilders, sub-contractors, remodelers and consumers. Builders FirstSourcerecently completed its merger with BMC Stock Holdings, Inc.
The average earnings surprise for BLDR in the trailing four quarters is 71.45%.
Boise Cascade (BCC - Free Report) :The Zacks Rank #2 company operates as a wood products manufacturer and building materials distributor.
The average earnings surprise for BCC in the trailing four quarters is 45.46%.
Robert Half International (RHI - Free Report) : Robert Half is one of the world's largest providers of professional consulting and staffing services. The company sports a Zacks Rank #1.
The average earnings surprise for RHI in the trailing four quarters is 19.49%.
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: https://www.zacks.com/performance.