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One of the most widely used tools to measure the potential of stocks is profitability analysis. It helps in evaluating whether a company can generate ample sales revenue not only to meet all its business operations but also to offer stable returns to investors.
There is no guarantee that the stock of a profitable company will always generate positive returns. If a profitable company has fundamental weakness, it might get reflected in its stock performance. However, multiple studies have indicated that a company with high profitability normally generates better returns.
One of the best ways of evaluating a company’s profitability position is by using the financial ratio analysis. Here, we have used one of the most widely used and effective profitability ratios — net income ratio.
Net Income Ratio
Profitability ratios are generally 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. The higher the net income ratio, the 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 Zacks Rank #1 (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. You can see the complete list of today’s Zacks #1 Rank stocks here.
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 a better financial performance.
% Rating Strong Buy greater than 70%: This indicates that 70% of the analysts covering these stocks are optimistic.
Here are five of the 12 stocks that qualified the screening:
Incyte Corporation (INCY - Free Report) is a drug discovery company that focuses on the development of proprietary therapeutics in oncology globally. Its expected earnings growth for the current quarter is 93.6%.
LegacyTexas Financial Group Inc. is a bank holding company. The company's holdings include LegacyTexas Bank. Its expected earnings growth for the current quarter is 59.4%.
Exelixis, Inc. (EXEL - Free Report) is a biopharmaceutical company committed to develop and commercialize new medicines for the treatment of cancer. Its expected earnings growth for the current quarter is 40%.
Bayerische Motoren Werke Aktiengesellschaft (BAMXF - Free Report) is a multi-brand automobile manufacturer that focuses on the premium segments of the worldwide automobile and motorcycle markets. Its expected earnings growth for the current quarter is 0.8%.
EQT Midstream Partners, LP is formed to own, acquire, operate and develop midstream assets in the Appalachian Basin.Its expected earnings growth for the current quarter is 11.2%.
By backtesting over a two-year timeframe (October 10, 2014 to October 14, 2016), a portfolio following this strategy provided a total return of 29.2% compared with the S&P 500’s return of 9.2%. 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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5 Profitable Stocks for Outstanding Returns
One of the most widely used tools to measure the potential of stocks is profitability analysis. It helps in evaluating whether a company can generate ample sales revenue not only to meet all its business operations but also to offer stable returns to investors.
There is no guarantee that the stock of a profitable company will always generate positive returns. If a profitable company has fundamental weakness, it might get reflected in its stock performance. However, multiple studies have indicated that a company with high profitability normally generates better returns.
One of the best ways of evaluating a company’s profitability position is by using the financial ratio analysis. Here, we have used one of the most widely used and effective profitability ratios — net income ratio.
Net Income Ratio
Profitability ratios are generally 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. The higher the net income ratio, the 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 Zacks Rank #1 (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. You can see the complete list of today’s Zacks #1 Rank stocks here.
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 a better financial performance.
% Rating Strong Buy greater than 70%: This indicates that 70% of the analysts covering these stocks are optimistic.
Here are five of the 12 stocks that qualified the screening:
Incyte Corporation (INCY - Free Report) is a drug discovery company that focuses on the development of proprietary therapeutics in oncology globally. Its expected earnings growth for the current quarter is 93.6%.
LegacyTexas Financial Group Inc. is a bank holding company. The company's holdings include LegacyTexas Bank. Its expected earnings growth for the current quarter is 59.4%.
Exelixis, Inc. (EXEL - Free Report) is a biopharmaceutical company committed to develop and commercialize new medicines for the treatment of cancer. Its expected earnings growth for the current quarter is 40%.
Bayerische Motoren Werke Aktiengesellschaft (BAMXF - Free Report) is a multi-brand automobile manufacturer that focuses on the premium segments of the worldwide automobile and motorcycle markets. Its expected earnings growth for the current quarter is 0.8%.
EQT Midstream Partners, LP is formed to own, acquire, operate and develop midstream assets in the Appalachian Basin.Its expected earnings growth for the current quarter is 11.2%.
By backtesting over a two-year timeframe (October 10, 2014 to October 14, 2016), a portfolio following this strategy provided a total return of 29.2% compared with the S&P 500’s return of 9.2%. 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 »