For Immediate Release
Chicago, IL – July 12, 2016 - Stocks in this week’s article include: Expeditors International of Washington Inc. (EXPD), Winnebago Industries, Inc. (WGO), Calavo Growers Inc. (CVGW), Ensign Group, Inc. ( ENSG) and Universal Forest Products Inc. (UFPI).
Screen of the Week of Zacks Investment Research:
5 Gems Unearthed Using the DuPont (NYSE:DD) Strainer
Return on equity (ROE) is one of the most popular ratios that investors use to single out healthy stocks. It is a profitability ratio that measures the earnings a company generates from its equity. However, taking a step beyond the basic ROE and analyzing it at an advanced level could lead to better returns.
Yes, we are talking about DuPont analysis. It is an analytical method, which critically examines three major elements – operating management, management of assets and the capital structure – related to the financial condition of a company. It’s basically taking ROE apart to examine how it works. Although it can be presented in several ways, the most popular one is shown below:
ROE = Net Income/Equity
Net Income / Equity = (Net Income / Sales) * (Sales / Assets) * (Assets / Equity)
ROE = Profit Margin * Asset Turnover Ratio * Equity Multiplier
DuPont versus ROE
The importance of ROE can’t be gainsaid but still it doesn’t always provide a complete picture. The DuPont analysis on the other hand allows investors to assess which of the elements is dominant in any change in ROE. It can help investors to segregate companies having high margins from those having high turnover. For example, high end fashion brands generally survive on high margin as compared with retail goods which rely on higher turnover.
In fact, it also sheds light on a 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, ROE of a company can be misleading if it has a high debt burden.
So, an investor confined solely to an ROE perspective will be at a loss if he or she has to judge between two stocks of equal ratio. DuPont analysis comes to the rescue and finds out the better stock. Thus, a company with a healthy mix of all the three metrics – profit margin, asset turnover ratio and equity multiplier – will be the most alluring.
DuPont analysis is not difficult, as the required numbers are available in a company’s income statement and balance sheet.
However, looking at the financial statements of each and every company separately can be a tedious task. Screening tools like Zacks Research Wizard can easily shortlist the stocks that look impressive based on 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 with a Zacks Rank #1 (Strong Buy) or 2 (Buy) generally outperform the market.
• 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 of the eight stocks that made it through the screen:
Expeditors International of Washington Inc. (EXPD) is engaged in the business of providing global logistics services. EXPD has an average four-quarter positive earnings surprise of 4.6%. The stock has a Zacks Rank #2.
Winnebago Industries, Inc. (WGO) enjoys leading position as the manufacturer of vehicles, which are used primarily in leisure travel and outdoor recreation activities in the U.S. This Zacks Rank #2 company has been witnessing positive estimate revision for the current year in last 30 days.
Calavo Growers Inc. (CVGW) is the avocado-industry leader on a global scale. The company is also engaged in procuring and marketing diversified fresh produce items such as tomatoes and tropical produce. Its earnings are expected to grow at a rate of 27.2% this year. The stock has a Zacks Rank #2.
The Ensign Group, Inc. (ENSG) is focused on providing skilled nursing and assisted living services, physical, occupational and speech therapies, home health and hospice services, urgent care services and other rehabilitative and healthcare services. This Zacks Rank #2 company is expected to report earnings growth of 27.2% this year.
Universal Forest Products Inc. (UFPI) focused on supplying wood, wood composite and other products, carries a Zacks Rank #2. The company has an expected EPS growth rate of 10% for the next 5 years, much higher than the industry average of 6.9%.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
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.
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EXPEDITORS INTL (EXPD): Free Stock Analysis Report
WINNEBAGO (WGO): Free Stock Analysis Report
CALAVO GROWERS (CVGW): Free Stock Analysis Report
ENSIGN GROUP (ENSG): Free Stock Analysis Report
UNIVL FST PRODS (UFPI): Free Stock Analysis Report
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