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6 Top-Ranked Stocks to Pick With Stellar Net Profit Margins

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

A higher net margin underlines a company’s efficiency in translating sales into actual profits. Moreover, this metric lends an insight into how well a company is run and the headwinds weighing on 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 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 30 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 30 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 #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.

Century Communities, Inc. CCS is a home-building and construction company. Its activities comprise land acquisition, development, and entitlements; and the acquisition, development, construction, marketing, and sale of various single-family detached and attached residential home projects. The stock currently sports a Zacks Rank of 1 and has a VGM Score of B. The Zacks Consensus Estimate for the ongoing-year earnings has been revised upward to $11.73 from $8.32 in seven days’ time.

Piper Sandler Companies PIPR is a focused securities firm dedicated to delivering superior financial advice, investment products and transaction execution within selected sectors of the financial services marketplace. The stock currently holds a Zacks Rank of 2 and has a VGM Score of A. The Zacks Consensus Estimate for 2021 earnings has moved up to $11.68 from $10.05 in the past seven days.

Triton International Limited TRTN is the largest lessor of intermodal containers (large steel boxes that are used for transporting freight by ship/rail/truck). At present, the stock carries a Zacks Rank of 2 and has a VGM Score of A. The consensus mark for this year’s earnings has moved 17.3% north to $8.26 in the past seven 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 B. The Zacks Consensus Estimate of 85 cents for this year’s 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/.


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
 
Citi Trends, Inc. (CTRN): Free Stock Analysis Report
 
Century Communities, Inc. (CCS): Free Stock Analysis Report
 
Veritiv Corporation (VRTV): Free Stock Analysis Report
 
Magic Software Enterprises Ltd. (MGIC): Free Stock Analysis Report
 
Triton International Limited (TRTN): Free Stock Analysis Report
 
Piper Sandler Companies (PIPR): Free Stock Analysis Report
 
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