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Bet on These 5 Stocks with Solid Net Profit Margin

Everybody loves to invest in a business that reports profits on a regular basis. And to gauge the extent of profit there is no better metric than the net profit margin.  

Net Profit Margin = Net profit /Sales * 100.

Net profit margin reflects a company’s ability to convert revenue into profit after deducting all operating and non-operating expenses as well as income tax payable.

Hence, a healthy net profit margin shows how successfully management has controlled costs. We note that stringent cost control as well as a lean cost structure provides a cushion to the company’s profitability during periods of downturn.

Moreover, a higher net profit margin as compared to peers lends a competitive advantage.

Net Profit Margin: A Preferred Metric for all

Net profit margin helps investors to understand a company’s business model in terms of pricing policy, cost structure and manufacturing efficiency. Hence, a healthy net profit margin is preferred by all kinds of investors.

However, net profit margin has a number of flaws that limit its scope as an effective analytical tool. Its calculation widely varies from industry to industry. Difference in accounting treatment of various items – especially non-cash expenses like depreciation and stock-based compensation – makes it a difficult metric for the purpose of comparison.

Further, for companies preferring to grow with debt, instead of equity funding, higher interest expense usually drags down the net profit. In such cases, it is not an effective tool to analyze the company’s performance.

The Winning Strategy

Healthy net profit margin and solid EPS growth are two of the most sought after ingredients in a business model.

Apart from these two metrics, we have added a few other criteria to ensure maximum possible return from this strategy.

Screening Parameters

Net Margin 12 monthsMost 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 growth prospects of the stock.

Zacks Rank equal to 1: Only Strong Buy stocks are allowed. In good markets or bad, stocks with a Zacks Rank of #1 (Strong Buy) continue to outperform.

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 (Buy) offer the best upside potential.

Here are five of the nine stocks that qualified the screen:

Brazil-based Braskem SA BAK produces and sells thermoplastic resins. Together with its subsidiaries, the company is the largest petrochemical operation in Latin America. The stock has a VGM score of ‘A’. Moreover, the Zacks Consensus Estimate for 2016 increased by a penny to $2.32 per share over the last 60 days.

Gibraltar Industries Inc. ROCK manufactures and distributes products to the industrial and buildings market. The stock has a VGM score of ‘A’. Meanwhile, the Zacks Consensus Estimate for 2016 increased by a penny to $1.38 per share over the last 60 days.

Toronto-based Just Energy Group Inc. JE is engaged in the sale of natural gas and/or electricity to residential and commercial customers under long-term fixed-price and price-protected contracts. The stock has a VGM score of ‘A’. Further, the Zacks Consensus Estimate for 2016 increased by a nickel to 31 cents per share over the last 60 days.

Hanwha Q CELLS Co. Ltd. HQCL is a photovoltaic manufacturer for solar cells and modules. The stock has a VGM score of ‘B’. Further, the Zacks Consensus Estimate for 2016 surged by 34 cents (25.4%) to $1.68 over the last 60 days.

Unique Fabricating Inc. UFAB is a supplier of components in the automotive and industrial appliance market. The stock has a VGM score of ‘B’. Moreover, the Zacks Consensus Estimate for 2016 increased by 3 cents (3.5%) to 88 cents over the last 60 days.

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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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BRASKEM SA (BAK): Free Stock Analysis Report
 
GIBRALTAR INDUS (ROCK): Free Stock Analysis Report
 
JUST ENERGY GRP (JE): Free Stock Analysis Report
 
HANWHA Q CELLS (HQCL): Free Stock Analysis Report
 
UNIQUE FABRICTG (UFAB): Free Stock Analysis Report
 
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