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6 Top-Ranked Stocks With Impressive Net Profit Margins

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Anirudha Bhagat
·6 min read
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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 the net profit margin.

A higher net margin reflects the company’s efficiency in converting sales into actual profits.

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, 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’ value.

Moreover, a higher net profit margin compared with its peers provides the company 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 own 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 environment. 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 are six of the 24 stocks that qualified the screen:

Citi Trends, Inc. CTRN is a value-priced retailer of urban fashion apparel and accessories for the entire family. The stock currently sports a Zacks Rank of 1 and has a VGM Score of A. The Zacks Consensus Estimate for fiscal 2022 earnings has been revised upward to $5.21 from $3.00 in the past seven days.

Veritiv Corporation VRTV engages in offering North American business-to-business distribution solutions. It provides packaging, print and print management, publishing, supply chain, facility and logistics solutions that span the entire lifecycle of core business operations. At present, the stock flaunts a Zacks Rank of 1 and has a VGM Score of A. The Zacks Consensus Estimate of $2.70 for the current-year earnings has moved 80% north over the past 60 days.

Matson, Inc. MATX operates as an ocean transportation and logistics company. It offers shipping services in Hawaii, Guam, and Micronesia islands, and expedited service from China to southern California. This Zacks Rank #1 stock currently has a VGM Score of A. The Zacks Consensus Estimate of $5.57 for the ongoing-year earnings has moved up 8 cents in the past week.

Select Medical Holdings Corporation SEM is a healthcare company, which owns long-term acute care and inpatient rehabilitation hospitals, as well as occupational health and physical therapy clinics. This Zacks Rank #1 Ranked stock has a VGM Score of B, at present. The Zacks Consensus Estimate of $2.23 for 2021 earnings has moved 66 cents north in 60 days’ time.

Deckers Outdoor Corporation DECK is a leading designer, producer, and brand manager of innovative, niche footwear and accessories developed for outdoor sports, and other lifestyle-related activities. At present, the stock carries a Zacks Rank of 2 and has a VGM Score of A. The Zacks Consensus Estimate of $14.27 for fiscal 2022 earnings has moved 10.8% north over the past 90 days.

Magic Software Enterprises Ltd. MGIC, a member of the Formula Group, develops, markets and supports software development and deployment technology that enables enterprises to facilitate the process of building and deploying applications that can be rapidly customized and integrated with existing systems. This Zacks Rank #2 stock currently has a VGM Score of A. The Zacks Consensus Estimate of 85 cents for 2021 earnings has been revised 5 cents upward in 60 days’ time.

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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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Deckers Outdoor Corporation (DECK) : Free Stock Analysis Report
 
Citi Trends, Inc. (CTRN) : Free Stock Analysis Report
 
Matson, Inc. (MATX) : Free Stock Analysis Report
 
Select Medical Holdings Corporation (SEM) : Free Stock Analysis Report
 
Veritiv Corporation (VRTV) : Free Stock Analysis Report
 
Magic Software Enterprises Ltd. (MGIC) : Free Stock Analysis Report
 
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