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Bet on the Winning DuPont Analysis & Pick 5 Top Stocks
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Key Takeaways
DuPont analysis breaks ROE into profit margin, asset turnover and financial leverage.
Five stocks passing the screen include VLO, GWW, EXPD, PARR and CASY.
A strong Zacks Rank and positive earnings surprises add to these stocks' appeal.
Return on equity (ROE) is one of the most favored metrics of investors. It is a profitability ratio that measures earnings generated by a company from its equity. Investors can follow the ROE trend in companies and compare it to historical or industry benchmarks to pick a winning stock.
However, stepping beyond the basic ROE and analyzing it at an advanced level could lead to even better returns. Here is where the DuPont analysis comes into play. It is an analytical method that examines three major elements – operating management, management of assets and the capital structure – related to the financial condition of a company. Below we show how DuPont breaks down ROE into its different components:
ROE = Net Income/Equity
Net Income / Equity = (Net Income / Sales) * (Sales / Assets) * (Assets / Equity)
Although one can’t play down the importance of a normal ROE calculation, the fact remains that it doesn’t always provide a complete picture. The DuPont analysis, on the other hand, allows investors to assess the elements that play a dominant role in any change in ROE. It can help investors to segregate companies having higher margins from those having high turnover. For example, high-end fashion brands generally survive on high margins as compared with retail goods, which rely on higher turnover.
In fact, it also sheds light on the company’s leverage status, which can go a long way in selecting stocks poised for gains. A lofty ROE could be due to the overuse of debt. Thus, the strength of a company can be misleading if it has a high debt load.
So, an investor confined solely to an ROE perspective may be confused if he or she has to judge between two stocks of equal ratio. This is where DuPont analysis wins and spots 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 environments.
• 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 out of seven stocks that made it through the screen:
Valero Energy: This Zacks Rank #1 company is a multinational manufacturer and marketer of petroleum-based and low-carbon liquid transportation fuels and petrochemical products. You can see the complete list of today’s Zacks #1 Rank stocks here.
The average earnings surprise of Valero Energy for the past four quarters is 26.80%.
W.W. Grainger:This Zacks Rank #2 company is a provider of industrial products principally in North America.
The average earnings surprise of GWW for the past four quarters is 5.91%.
Expeditors International of Washington: This Zacks Rank #2 company is a leading third-party logistics (3PL) provider.
The average earnings surprise of EXPD for the past four quarters is 17.15%.
Par Pacific: This Zacks Rank #1 company is a growth-oriented energy company supplying conventional and renewable fuels across the western United States. It is headquartered in Houston, TX.
The average earnings surprise of PARR for the past four quarters is 48.67%.
Casey's General Stores: This Zacks Rank #2 company operates convenience stores under the Casey's and Casey's General Store names in 19 states, mainly Iowa, Missouri and Illinois.
The average earnings surprise of CASY for the past four quarters is 17.52%.
View the Zacks #1 Rank List
Image: Bigstock
Bet on the Winning DuPont Analysis & Pick 5 Top Stocks
Key Takeaways
Return on equity (ROE) is one of the most favored metrics of investors. It is a profitability ratio that measures earnings generated by a company from its equity. Investors can follow the ROE trend in companies and compare it to historical or industry benchmarks to pick a winning stock.
However, stepping beyond the basic ROE and analyzing it at an advanced level could lead to even better returns. Here is where the DuPont analysis comes into play. It is an analytical method that examines three major elements – operating management, management of assets and the capital structure – related to the financial condition of a company. Below we show 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
The screener yields winning stocks like Valero Energy (VLO - Free Report) , W.W. Grainger (GWW - Free Report) , Expeditors International of Washington (EXPD - Free Report) , Par Pacific (PARR - Free Report) and Casey's General Stores (CASY - Free Report) .
Why Use DuPont?
Although one can’t play down the importance of a normal ROE calculation, the fact remains that it doesn’t always provide a complete picture. The DuPont analysis, on the other hand, allows investors to assess the elements that play a dominant role in any change in ROE. It can help investors to segregate companies having higher margins from those having high turnover. For example, high-end fashion brands generally survive on high margins as compared with retail goods, which rely on higher turnover.
In fact, it also sheds light on the company’s leverage status, which can go a long way in selecting stocks poised for gains. A lofty ROE could be due to the overuse of debt. Thus, the strength of a company can be misleading if it has a high debt load.
So, an investor confined solely to an ROE perspective may be confused if he or she has to judge between two stocks of equal ratio. This is where DuPont analysis wins and spots 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 environments.
• 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 out of seven stocks that made it through the screen:
Valero Energy: This Zacks Rank #1 company is a multinational manufacturer and marketer of petroleum-based and low-carbon liquid transportation fuels and petrochemical products. You can see the complete list of today’s Zacks #1 Rank stocks here.
The average earnings surprise of Valero Energy for the past four quarters is 26.80%.
W.W. Grainger:This Zacks Rank #2 company is a provider of industrial products principally in North America.
The average earnings surprise of GWW for the past four quarters is 5.91%.
Expeditors International of Washington: This Zacks Rank #2 company is a leading third-party logistics (3PL) provider.
The average earnings surprise of EXPD for the past four quarters is 17.15%.
Par Pacific: This Zacks Rank #1 company is a growth-oriented energy company supplying conventional and renewable fuels across the western United States. It is headquartered in Houston, TX.
The average earnings surprise of PARR for the past four quarters is 48.67%.
Casey's General Stores: This Zacks Rank #2 company operates convenience stores under the Casey's and Casey's General Store names in 19 states, mainly Iowa, Missouri and Illinois.
The average earnings surprise of CASY for the past four quarters is 17.52%.