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Scared of Volatile Market? Buy 5 DuPont-Tested Quality Stocks
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As inflation rose, rising rate worries took markets in its grip and market volatility edged higher, investors started hunting for quality picks to stay unscathed. Betting on stocks that are rich in return on equity (ROE) can be rewarding in this regard.
ROE is one of the most coveted metrics among investors in search of profit-generating stocks. But ROE doesn’t always tell the complete story and an investor might make a mistake by selecting stocks based on this ratio. Thus, taking a step beyond the basic ROE and analyzing it at an advanced level or applying the DuPont technique seem a prudent decision.
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 83 stocks that made it through the screen:
The average earnings surprise of POOL for the past four quarters is 24.01%.
The ONE Group Hospitality (STKS - Free Report) : The hospitality company has a Zacks Rank #2. It develops, manages and operates a portfolio of high-energy restaurants, lounges and bars.
The average earnings surprise of STKS for the past four quarters is 0.86%.
Levi Strauss & Co. (LEVI - Free Report) : The Zacks Rank #2 company designs and markets jeans, casual wear and related accessories for men, women and children under the Levi's, Dockers, Signature by Levi Strauss & Co. and Denizen brands.
The average earnings surprise of LEVI for the past four quarters is 48.48%.
MarineMax (HZO - Free Report) : The Zacks Rank #1 companyis the nation's largest recreational boat and yacht retailer.
The average earnings surprise of HZO for the past four quarters is 32.75%.
Carriage Services (CSV - Free Report) : The Zacks Rank #2 companyis a leading provider of death care services and products in the United States.
The average earnings surprise of CSV for the past four quarters is 17.40%.
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
Scared of Volatile Market? Buy 5 DuPont-Tested Quality Stocks
As inflation rose, rising rate worries took markets in its grip and market volatility edged higher, investors started hunting for quality picks to stay unscathed. Betting on stocks that are rich in return on equity (ROE) can be rewarding in this regard.
ROE is one of the most coveted metrics among investors in search of profit-generating stocks. But ROE doesn’t always tell the complete story and an investor might make a mistake by selecting stocks based on this ratio. Thus, taking a step beyond the basic ROE and analyzing it at an advanced level or applying the DuPont technique seem a prudent decision.
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 83 stocks that made it through the screen:
Pool Corp. (POOL - Free Report) : This Zacks Rank #2 company is the world's largest wholesale distributor of swimming pool supplies, equipment and related products. You can see the complete list of today’s Zacks #1 Rank stocks here.
The average earnings surprise of POOL for the past four quarters is 24.01%.
The ONE Group Hospitality (STKS - Free Report) : The hospitality company has a Zacks Rank #2. It develops, manages and operates a portfolio of high-energy restaurants, lounges and bars.
The average earnings surprise of STKS for the past four quarters is 0.86%.
Levi Strauss & Co. (LEVI - Free Report) : The Zacks Rank #2 company designs and markets jeans, casual wear and related accessories for men, women and children under the Levi's, Dockers, Signature by Levi Strauss & Co. and Denizen brands.
The average earnings surprise of LEVI for the past four quarters is 48.48%.
MarineMax (HZO - Free Report) : The Zacks Rank #1 companyis the nation's largest recreational boat and yacht retailer.
The average earnings surprise of HZO for the past four quarters is 32.75%.
Carriage Services (CSV - Free Report) : The Zacks Rank #2 companyis a leading provider of death care services and products in the United States.
The average earnings surprise of CSV for the past four quarters is 17.40%.
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.