Bet On These 5 Profitable Stocks For Big Returns
Zacks Investment Research | Sep 02, 2016 07:26AM ET
A company with strong profit generating capabilities usually has the proficiency to meet business expenses and create steady returns for investors. However, if such profitable companies have weak fundamentals, they might fail to provide attractive returns.
Multiple studies show that a company with healthy profits usually provides satisfactory returns to investors.
Here, we have used profitability ratios to determine the profit making capability of a company. There are several profitability ratios from which we have picked one of the most effective profitability determinant – net income ratio.
Net Income Ratio
Net income ratio gives us the exact profitability level of a company. It reflects the percentage of net income to total sales revenue. Using net income ratio one can determine a company’s effectiveness to pay for its operating and non-operating expenses from its sales revenue. A higher net income ratio usually implies a company’s ability to generate ample sales revenue and successfully manage all its business functions.
Screening Parameters
Net income ratio is not the only indicator of future winners. As such, we have added a few additional criteria to arrive at a winning strategy.
Zacks Rank equal to #1: Only Strong Buy stocks are allowed. With the Zacks Rank proving itself to be one of the best rating systems out there, this is a great way to start things off.
12-Month Trailing Sales and Net Income Growth Higher than X Industry: Stocks that possess higher sales and net income growth in the last 12 months showcase better financial performance.
12-Month Trailing Net Income Ratio Higher than X Industry: High net income ratio indicates a company’s solid profitability.
% Rating Strong Buy greater than 70%: This indicates that 70% of the analysts covering these stocks are optimistic.
Here are five of the 9 stocks that qualified the screening:
Corcept Therapeutics Incorporated (NASDAQ:CORT) is a pharmaceutical company. It has an average four-quarter earnings surprise of 100%.
Parsley Energy, Inc. (NYSE:PE) is an independent oil and natural gas company with an average four-quarter earnings surprise of 97.9%.
TRI Pointe Group, Inc. (NYSE:TPH) is engaged in construction, design and sale of single-family homes. It has an average four-quarter earnings surprise of 34.6%.
NuVasive, Inc. (NASDAQ:NUVA) is a medical device company focused on the design, development and marketing of products for the surgical treatment of spine disorders. It has an average four-quarter earnings surprise of 19%.
Facebook, Inc. (NASDAQ:FB) operates as a social networking website worldwide, where users connect, share and communicate with each other. It has an average four-quarter earnings surprise of 18.3%.
While backtesting over a two-year timeframe (August 15, 2014 to August 19, 2016), a portfolio following this strategy provided a total return of 29.7% compared with the S&P 500’s return of 8.6%. Thus, this strategy may prove profitable for those looking to beat the markets.
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