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One of the best ways to evaluate the prospects of stocks is to use profitability analysis. It helps to estimate whether it has surplus sales revenue even after meeting all its costs and expenses. Though a profitable company is preferred over a loss making entity, doubts still persist as to the extent a profitable company can generate strong returns. This is mainly because a profitable company with weak fundamentals is unlikely to display strong stock price appreciation.
At the same time, multiple studies have shown that companies with high profitability generally offer attractive returns.
In order to measure a company’s profitability we have chosen one of the most widely used and easy to understand profitability metrics, net income ratio.
Net Income Ratio
Profitability ratios in general are classified into gross income ratio, operating income ratio, pretax profit margin and net income ratio. Here, we have selected net income ratio in order to assess the exact level of profitability of a company.
Net income ratio is measured by dividing net income by total sales revenue. Higher the net income ratio better is the company’s profitability. This is because it showcases how effectively the company pays all its business related expenses and generates funds.
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 Net Income Ratio Higher than X Industry: A higher net income ratio indicates a company’s solid profitability.
12-Month Trailing Sales and Net Income Growth Higher than X Industry: Stocks that have displayed higher sales and net income growth in the last 12 months showcase better financial performance.
% Rating Strong Buy greater than 70%: This indicates that 70% of the analysts covering these stocks are optimistic.
Here are 5 of the 14 stocks that qualified the screening:
New Media Investment Group Inc. is an online advertising and digital marketing company. This Zacks Rank #1 company has an average four-quarter earnings surprise of 17.7%.
Ollie's Bargain Outlet Holdings, Inc. (OLLI - Free Report) is a retailer of different precuts ranging from food products to electronics and hardware products. This Zacks Rank #1 company has an average four-quarter earnings surprise of 21.3%.
Orchids Paper Products Company is a company that manufacturers and converts tissue product for the private label consumer market. This Zacks Rank #1 company has an average four-quarter earnings surprise of 30.1%.
Paycom Software, Inc. (PAYC - Free Report) is a provider of a cloud-based human capital management software solution delivered as Software-as-a-Service. This Zacks Rank #1 company has an average four-quarter earnings surprise of 33.5%.
IRadimed Corporation (IRMD - Free Report) engages in developing, manufacturing, marketing, and distributing magnetic resonance imaging (MRI) compatible products. This Zacks Rank #1 company has an average four-quarter earnings surprise of 7.6%.
While backtesting over a two-year timeframe (June 20, 2014 to June 17, 2016), a portfolio following this strategy provided a total return of 22% compared with the S&P 500’s return of 5.5%. Thus, this strategy may prove profitable for those looking to beat the markets.
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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Buy These 5 Profitable Stocks for Higher Returns
One of the best ways to evaluate the prospects of stocks is to use profitability analysis. It helps to estimate whether it has surplus sales revenue even after meeting all its costs and expenses. Though a profitable company is preferred over a loss making entity, doubts still persist as to the extent a profitable company can generate strong returns. This is mainly because a profitable company with weak fundamentals is unlikely to display strong stock price appreciation.
At the same time, multiple studies have shown that companies with high profitability generally offer attractive returns.
In order to measure a company’s profitability we have chosen one of the most widely used and easy to understand profitability metrics, net income ratio.
Net Income Ratio
Profitability ratios in general are classified into gross income ratio, operating income ratio, pretax profit margin and net income ratio. Here, we have selected net income ratio in order to assess the exact level of profitability of a company.
Net income ratio is measured by dividing net income by total sales revenue. Higher the net income ratio better is the company’s profitability. This is because it showcases how effectively the company pays all its business related expenses and generates funds.
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 Net Income Ratio Higher than X Industry: A higher net income ratio indicates a company’s solid profitability.
12-Month Trailing Sales and Net Income Growth Higher than X Industry: Stocks that have displayed higher sales and net income growth in the last 12 months showcase better financial performance.
% Rating Strong Buy greater than 70%: This indicates that 70% of the analysts covering these stocks are optimistic.
Here are 5 of the 14 stocks that qualified the screening:
New Media Investment Group Inc. is an online advertising and digital marketing company. This Zacks Rank #1 company has an average four-quarter earnings surprise of 17.7%.
Ollie's Bargain Outlet Holdings, Inc. (OLLI - Free Report) is a retailer of different precuts ranging from food products to electronics and hardware products. This Zacks Rank #1 company has an average four-quarter earnings surprise of 21.3%.
Orchids Paper Products Company is a company that manufacturers and converts tissue product for the private label consumer market. This Zacks Rank #1 company has an average four-quarter earnings surprise of 30.1%.
Paycom Software, Inc. (PAYC - Free Report) is a provider of a cloud-based human capital management software solution delivered as Software-as-a-Service. This Zacks Rank #1 company has an average four-quarter earnings surprise of 33.5%.
IRadimed Corporation (IRMD - Free Report) engages in developing, manufacturing, marketing, and distributing magnetic resonance imaging (MRI) compatible products. This Zacks Rank #1 company has an average four-quarter earnings surprise of 7.6%.
While backtesting over a two-year timeframe (June 20, 2014 to June 17, 2016), a portfolio following this strategy provided a total return of 22% compared with the S&P 500’s return of 5.5%. Thus, this strategy may prove profitable for those looking to beat the markets.
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 »