U.S. Markets closed

Bet on These Top 6 Picks That Boast Solid Net Profit Margin

Zacks Equity Research

Investors eye businesses that generate profits on a regular basis. In order to gauge the extent of profit, there is no better metric than the net profit margin.

A higher net margin reflects a company’s efficiency in converting sales into actual profit. Moreover, this metric lends an insight into how well a company is run and the headwinds confronting it.

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 in a company operations and 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 that eventually add to the value of the business.

Moreover, a higher net profit margin compared to its peers gives 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.

Moreover, the difference in accounting treatment of various items — especially non-cash expenses like depreciation and stock-based compensation — makes comparison a daunting task.

Further, 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 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 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 33 stocks that qualified the screen:

Black Mountain, NC-based Ingles Markets, Inc. IMKTA is a leading supermarket chain with operations in the Southeast United States. The Zacks Consensus Estimate of $3.9 for fiscal 2019 earnings has been steady over the past 30 days. The stock has a Zacks Rank #1 and a VGM Score of A.

North American Construction Group Ltd. NOA is involved primarily in providing services related to mining and heavy construction. The stock is Zacks #1 Ranked and has a VGM Score of A. The Zacks Consensus Estimate for 2019 earnings has been reiterated at $1.26 in the past 30 days.

Headquartered in Oak Brook, IL, Great Lakes Dredge & Dock Corp. GLDD provides dredging services in the United States and internationally. The stock is a Zacks #1 Ranked player and has a VGM Score of A. The Zacks Consensus Estimate for 2019 earnings of 74 cents has moved a couple of cents north in the past 30 days.

Bellevue, WA-domiciled Radiant Logistics, Inc. RLGT operates as a third-party logistics and multi-modal transportation services company. The stock has a Zacks Rank of 1 and a VGM Score of A. The Zacks Consensus Estimate for fiscal 2020 earnings of 52 cents has been raised 4% in the past 30 days.

Based in Austin, TX, Hanger Inc. HNGR delivers orthotic and prosthetic patient care, and distributes O&P products plus rehabilitative solutions. The stock is a #1 Ranked player and has a VGM Score of B. Further, the Zacks Consensus Estimate for 2019 earnings of 87 cents has been constant in the past 30 days.

Domiciled in St. George, UT, SkyWest, Inc. SKYW operates a regional airline in the United States. The stock has a Zacks Rank of 2 and a VGM Score of A. The Zacks Consensus Estimate for 2019 earnings of $6.18 has been reaffirmed in the past 30 days.

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.


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
SkyWest, Inc. (SKYW) : Free Stock Analysis Report
 
Great Lakes Dredge & Dock Corporation (GLDD) : Free Stock Analysis Report
 
North American Construction Group Ltd. (NOA) : Free Stock Analysis Report
 
Ingles Markets, Incorporated (IMKTA) : Free Stock Analysis Report
 
Radiant Logistics, Inc. (RLGT) : Free Stock Analysis Report
 
Hanger Inc. (HNGR) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research