DuPont: A Less-Traversed Path to Pick 5 Winning Stocks
The return on equity is one of the most trusted metrics used by investors. This profitability ratio enables investors to distinguish between a profit distiller and a profit distiller. It measures the profits a company makes from its equity.
To get these gems shortlisted, you can look at the DuPont technique to analyze the basic ROE at an advanced level. Here's how DuPont divides the ROE into its various components:
ROE = net income / equity
Net income / equity = (net income / turnover) * (turnover / assets) * (assets / equity)
ROE = profit margin * asset turnover ratio * share multiplier
Why Use DuPont?
Although the importance of a normal ROE calculation cannot be downplayed, the fact remains that it does not always provide a complete picture. The DuPont analysis, on the other hand, enables investors to evaluate the elements that play a dominant role in any change in ROE. This can help investors separate companies with higher margins from companies with high sales. For example, high-end fashion brands generally survive with high margins compared to retail goods that rely on higher sales.
In fact, there is also information about the company's leverage status, which can make a huge contribution to the selection of stocks that are geared towards profits. A high ROE could be due to excessive debt use. Therefore, a company's strength can be misleading when it has a high debt burden.
An investor who focuses solely on an ROE perspective can be confused when he has to judge between two shares with the same ratio. This is where the DuPont analysis comes in and recognizes the better stock.
Investors can easily perform this analysis by looking at the company's financial information. However, it can be a tedious task to look at each company's financial reports individually. Screening tools like the Zacks Research Wizard can help you shortlist stocks that look impressive with a DuPont analysis.
• Profit margin greater than or equal to 3: As the name suggests, this is a measure of how profitable the business is. In general, it is the main factor in return on investment.
• Asset Turnover Ratio greater than or equal to 2: An investor can assess the efficiency of management when using assets to increase sales.
• Equity multiplier between 1 and 3: This is an indication of how much debt the company is using to finance its assets.
• Zacks rank less than or equal to 2: stocks with a Zacks rank 1 (strong buy) or 2 (buy) generally outperform their competitors in all market environments.
• Current price over 5 USD: This shows the cheap stocks. When looking for cheaper stocks, however, this criterion can be removed.
Here are all five stocks that made it through the screen:
Medifast Inc. MED: This company from Zacks Rank # 1 is a leading manufacturer and distributor of clinically proven products and programs for a healthy life. It comes from a cheap Zacks industry (among the top 15% of the more than 250 industries in the Zacks universe). The full list of today's Zacks # 1 Rank stocks can be found here.
Systemax Inc. SYX: The company is a direct marketer of branded and private label products, including personal desktop computers, notebooks, computer products and industrial products, in North America and Europe. The stock has a Zacks rank 1. It comes from a cheap Zacks industry (top 17%).
USANA Health Sciences Inc. USNA: The company develops and produces high-quality products for nutrition, personal care and weight management. The stock has a Zacks rank 1. It comes from a cheap Zacks industry (top 23%).
AllianceBernstein Holding L.P. AB: The number 1 company offers diversified investment management services, primarily for pension funds, foundations, foreign financial institutions and individual investors. It comes from a cheap Zacks branch (top 13%).
Kforce, Inc. KFRC: kforce.com is a full-service, web-based HR company that offers HR solutions for organizations and career management for individuals. It has a zags rank 2.
You can now register for your two-week free trial with the Research Wizard and use this screen in your own trading. You can also create your own strategies and test them first before taking the plunge.
The research assistant is a good start. It is easy to use. Everything is in plain text. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open the research assistant, connect your finds, and see which gems come out.
Click here to sign up for a free trial of the Research Wizard today.
Disclosure: Directors, directors and / or employees of Zacks Investment Research may own or have sold short securities and / or hold long and / or short positions in the options mentioned in this material. An affiliated investment firm may own or have sold short securities and / or hold long and / or short positions in options mentioned in this material.
Disclosure: Performance information for Zacks' portfolios and strategies can be found at: https://www.zacks.com/performance.
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Systemax Inc. (SYX): Free stock analysis report
AllianceBernstein Holding L.P. (AB): Free stock analysis report
Kforce, Inc. (KFRC): Free Stock Analysis Report
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MEDIFAST INC (MED): Free stock analysis report
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