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5 Profitable Stocks for Enhancing Your Portfolio Returns

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The profitability of a company primarily indicates its ability to generate surplus sales revenue to not only meet all its expenses but also create stable returns for its investors. However, it is not necessary that a profitable company will succeed in generating favorable returns. That’s because such a company might have certain fundamental weaknesses, which may hamper its stock price.

But, several studies indicate that a company with high profitability generally produces attractive returns.

Here, we have used profitability ratios to arrive at a detailed understanding of a company’s profitability position. From a variety of profitability ratios we have selected net income ratio, as it is the simplest and most effective profitability metric.

Net Income Ratio

Net income ratio shows the bottom line of a company. It reflects the percentage of net income to total sales revenue. Using net income ratio one can measure a company’s effectiveness to pay all its operating and non-operating expenses from its sales revenue. A higher net income ratio normally 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. As such, we have added a few additional criteria to arrive at a winning strategy.  

Zacks Rank equal to #1: Only 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.

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 5 of the 12 stocks that qualified the screen:

Dycom Industries Inc.(DY - Free Report) is a leading provider of specialty contracting services throughout the United States. This Zacks Rank #1 company reported earnings per share (EPS) of $1.08 last quarter, surpassing the Zacks Consensus Estimate of 75 cents. Dycom Industries also has an average four-quarter earnings surprise of 19.6%.

QVC Group markets and sells various consumer products primarily through live televised shopping programs, websites and other interactive media. This Zacks Rank #1 company reported EPS of 36 cents last quarter, surpassing the Zacks Consensus Estimate of 18 cents. QVC Group also has an average four-quarter earnings surprise of more than 40.3%.

Retrophin, Inc. is a pharmaceutical company that focuses on the development and commercialization of drugs in order to treat serious diseases. This Zacks Rank #1 company reported EPS of 14 cents last quarter, in contrast to the Zacks Consensus Estimate of a loss of 25 cents. Retrophin also has an average four-quarter earnings surprise of more than 100%.

Facebook, Inc. operates a social networking website worldwide, where users connect, share and communicate with each other. This Zacks Rank #1 company reported EPS of 57 cents last quarter, beating the Zacks Consensus Estimate of 44 cents. Facebook also has an average four-quarter earnings surprise of 11.8%.

Gener8 Maritime Inc. offers marine transportation services. It is involved in the transportation of crude oil and petroleum products. This Zacks Rank #1 company reported EPS of 76 cents last quarter, outpacing the Zacks Consensus Estimate of 69 cents. Gener8 Maritime also has an average four-quarter earnings surprise of 1.4%.

While backtesting over a two-year timeframe (June 06, 2014 to June 03, 2016), a portfolio following this strategy provided a total return of 20.3% compared with the S&P 500’s return of 6.8%. Thus, this strategy may prove profitable for those looking to beat the markets.

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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.

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