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4 Stocks Worth Adding to Your Portfolio on Solid Net Profit Margin

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Investors prefer to put their money in businesses that reap profits on a regular basis. In order to gauge the extent of profits, there is no better metric than net profit margin.

A higher net margin reflects a company’s efficiency in converting sales into actual profits. BrainsWay Ltd. (BWAY - Free Report) , Qifu Technology, Inc. (QFIN - Free Report) , Great Lakes Dredge & Dock Corporation (GLDD - Free Report) and The Gorman-Rupp Company (GRC - Free Report) boast solid net profit margins.

Net Profit Margin = Net profit/Sales * 100.

In simple terms, net profit is the amount a company retains after deducting all costs, interest, depreciation, taxes and other expenses. In fact, the net profit margin can turn out to be a potent point of reference to gauge the strength of a company’s operations and its cost-control measures.

Also, higher net profit is essential for rewarding stakeholders. Further, strength in the metric not only attracts investors but also draws well-skilled employees who eventually enhance a business's value.

Moreover, a higher net profit margin compared with its peers provides the company with a competitive edge.

Pros and Cons

Net profit margin helps investors gain clarity on a company’s business model in terms of pricing policy, cost structure and manufacturing efficiency. Hence, a strong net profit margin is preferred by all classes of investors.

However, net profit margin as an investment criterion has its share of pitfalls. The metric varies widely from industry to industry. While net income is a key metric for investment measurement in traditional industries, it is not that important for technology companies.

In addition, the difference in accounting treatment of various items — especially non-cash expenses like depreciation and stock-based compensation — makes comparison a daunting task.

Furthermore, for companies preferring to grow with debt instead of equity funding, higher interest expenses usually weigh on net profit. In such cases, the measure is rendered ineffective while analyzing a company’s performance.

The Winning Strategy

A healthy net profit margin and solid EPS growth are the two most sought-after elements in a business model.

Apart from these, we have added a few criteria to ensure maximum returns from this strategy.

Screening Parameters

Net Margin 12 months – Most Recent (%) greater than equal to 0: High net profit margin indicates solid profitability.

Percentage Change in EPS F(0)/(F-1) greater than equal to 0: It indicates earnings growth.

Average Broker Rating (1-5) equal to 1: A rating of #1 indicates brokers’ extreme bullishness on the stock.

Zacks Rank less than or equal to 2: Stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) generally perform better than their peers in all types of market environments. You can see the complete list of today’s Zacks #1 Rank stocks here.

VGM Score of A or B: Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 or 2, offer the best upside potential.

Here we discuss our four picks from the 27 stocks that qualified the screening:

BrainsWay is a commercial stage medical device company. It is focused on the development and sale of non-invasive neuromodulation products using the company's proprietary Deep Transcranial Magnetic Stimulation technology for the treatment of major depressive disorder and obsessive-compulsive disorder. The stock sports a Zacks Rank #1 and has a VGM Score of A.

The Zacks Consensus Estimate for BrainsWay’s 2024 earnings has moved 4 cents north in the past 60 days and currently stands at 6 cents per share. BWAY surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 139.7%.

Qifu Technology is a credit-tech platform principally in China that provides a comprehensive suite of technology services to assist financial institutions and consumers and small & medium enterprises in the loan lifecycle, ranging from borrower acquisition, preliminary credit assessment, fund matching and post-facilitation services. The stock has a Zacks Rank of 1 at present and a VGM Score of A.

The Zacks Consensus Estimate for Qifu Technology’s 2024 earnings has been revised upward to $4.94 per share from $4.10 in the past 30 days. QFIN surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while matching the same on one occasion, the average surprise being 8.6%.

Great Lakes Dredge & Dock is the largest provider of dredging services in the U.S. conducting business to maintain and deepen shipping channels, reclaim land from the ocean, and renourish storm-damaged coastline. At present, the stock carries a Zacks Rank #2 and has a VGM Score of A.

The Zacks Consensus Estimate for Great Lakes Dredge & Dock’s 2024 earnings has been revised upward by 3 cents to 80 cents per share in the past 30 days. GLDD surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 215.3%.

Gorman-Rupp designs, manufactures and sells pumps and related equipment (pump and motor controls) for use in water, wastewater, construction, industrial, petroleum, original equipment, agricultural, fire protection, military and other liquid-handling applications. The stock currently carries a Zacks Rank #2 and has a VGM Score of A.

The Zacks Consensus Estimate of $1.85 per share for Gorman-Rupp’s 2024 earnings has moved 19 cents north in the past 60 days. GRC surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while missing the same on one occasion, the average surprise being 11.9%.

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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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