To create the list below we began by screening for high Return on Invested Capital (ROIC) - a good measure of how effectively a company uses capital to generate returns.
ROIC = (Net Income - Dividends) / Total Capital
Invested capital can include cash, buildings, machinery, other businesses, etc. However, ROIC does not provide investors with details as to where those returns are being generated, so it is best to compare stocks based on ROIC along with other fundamentals.
Building the List
We began by screening for stocks with exceptionally high ROIC, above 500%. This left us with a list of 17 stocks, from which we selected three companies representing different sectors of the market to further scrutinize.
We searched trends in returns for each stock, including: Return on Assets (ROA), the result of dividing a company's annual earnings by its total assets, Return on Equity (ROE), the total net income returned as a percentage of shareholders equity, and Return on Investment (ROI), a measure of profitability that is calculated by dividing net profits by total assets.
Next we found different positive trends for each stock, including encouraging trends in accounts receivable and inventory turnover, DuPont Breakdown and LFCF/EV ratio.
While all three companies have high levels of ROIC, an important metric to value investors, turning invested capital into profit is not always enough to merit the purchase of a stock. And as an alternate point of reference, we included the compensation for the CEO and/or trustees of each company, to give an indication as to how they reward their executives for bringing in such high returns.
For an interactive version of this chart, click on the image below. Average analyst ratings sourced from Zacks Investment Research.
Does the fact that these stock have incredibly high ROIC make them good investments? Use the list below as a starting point for your own analysis:
1. REX American Resources Corporation (REX): Engages in the production and sale of ethanol and distillers grains.
- Market cap at $178.32M, most recent closing price at $21.80
- ROIC: 5,946.80%
- ROI: -0.62%
- ROE: -1.17%
- ROA: -0.53%
- Performance YTD: 13.01%
- Executive compensation: Chairman of the Board and CEO awarded $154,500 in salary in 2012. Vice President - Finance and CFO awarded $275,900 in salary and other compensation in 2012. President and Chief Operating Officer awarded $199,270 in salary and other compensation in 2012
REX has recorded great gains over the last month, when compared to its industry peers. The stock returned 17.54% since 4/22/13, better than BioFuel Energy Corp. (BIOF) and Archer Daniels Midland Company (ADM), which returned 1.46% and 7.37%, respectively, during the same time period. Competitor Green Plains Renewable Energy, Inc. (GPRE) outperformed all three, returning 40.56% over the same period.
The company's earnings growth looks weak, with EPS growing by -112.20% over the last year. This is weaker than competitors like GPRE (EPS growth over the last year at -61.54%) but still better than BIOF (EPS growth over the last year at -315.47%%).
Revenue grew by 2.45% during the most recent quarter ($174.64M vs. $170.47M y/y). Accounts receivable grew by -11.58% during the same time period ($12.91M vs. $14.6M y/y). Receivables, as a percentage of current assets, decreased from 11.49% to 11.23% during the most recent quarter (comparing 3 months ending 2013-01-31 to 3 months ending 2012-01-31).
Inventory grew by -17.89% during the same time period ($24.92M vs. $30.35M y/y). Inventory, as a percentage of current assets, decreased from 23.89% to 21.68% during the most recent quarter (comparing 3 months ending 2013-01-31 to 3 months ending 2012-01-31).
According to The New York Times, REX is a holding company with diverse investments. It serves as landlord for six former retail stores and 16 vacant former retail properties as of last year, and partially leases out a distribution center. REX also invests in ethanol production entities, including One Earth Energy, LLC, NuGen Energy, LLC, Patriot Renewable Fuels, LLC, Levelland Hockley County Ethanol, LLC and Big River Resources.
2. Mesabi Trust (MSB): Operates as a royalty trust, deriving income from the Peter Mitchell Mine in Minnesota, along the eastern end of the Mesabi Iron Range.
- Market cap at $272.37M, most recent closing price at $20.76
- ROIC: 2,593.00%
- ROI: 2,769.50%
- ROE: 2,769.50%
- ROA: 325.85%
- Performance YTD: -16.49%
- Executive compensation: Four individual trustees awarded $40,877 each as trustee fees, in the fiscal year ending 1/31/2013. One corporate trustee awarded $155,997 as trustee fee and other compensation, in the fiscal year ending 1/31/2013
The company has returned 0.87% since 4/22/13, and is one of the worst performing stocks in its industry. The stock is falling behind companies like Sabine Royalty Trust (SBR), Great Northern Iron Ore Properties (GNI) and North European Oil Royalty Trust (NRT), which returned 7.90%, 5.72% and 7.14%, respectively, during the same time period.
MSB has reported less than stellar earnings growth over the last year, with EPS growing by -7.77%, worse than NRT (EPS growth over the last year at -6.55%). But it still beat out SBR (EPS growth over the last year at -10.65%), GNI (EPS growth over the last year at -12.93%) and industry titan Vale S.A. (VALE) (EPS growth over the last year at -68.33%).
DuPont Analysis: MRQ net profit margin at 95.99% vs. 95.59% y/y. MRQ sales/assets at 0.652 vs. 0.589 y/y. MRQ assets/equity at 6.483 vs. 10.845 y/y.
Recently TheStreet downgraded MSB from buy to hold, citing weak EPS growth and disappointing operating cash flow, despite a debt-to-equity ratio of 0 and increasing profit margins. And as explained by The Motley Fool, MSB derives its income from one single iron ore mine, which is operated by a subsidiary of Cliffs Natural Resources (CLF). CLF has seen a 71.5% fall in net income over the last year.
3. Threshold Pharmaceuticals Inc. (THLD): Engages in the discovery and development of drugs targeting the microenvironment of solid tumors for patients living with cancer.
- Market cap at $315.55M, most recent closing price at $5.58
- ROIC: 513.50%
- ROI: 42.76%
- ROE: N/A
- ROA: 34.56%
- Performance YTD: 32.54%
- Executive compensation: CEO awarded $1.56M in salary, bonus, options and other compensation in 2012
THLD has recorded great gains over the last month, when compared to its closest competitors. The stock returned 17.09% since 4/22/13, better than Sunesis Pharmaceuticals, Inc. (SNSS), Biogen Idec Inc. (BIIB) and Gilead Sciences Inc. (GILD), which returned 4.15%, 4.64% and 3.13% during the same holding period.
The company's earnings growth looks weak, with EPS growing by -134.75% over the last year. This is considerably weaker than competitors like SNSS (EPS growth over the last year at -110.36%)Clovis Oncology, Inc. (CLVS) (EPS growth over the last year at -19.57%) and Celgene Corporation (EPS growth over the last year at 15.97%).
Levered free cash flow at $31.75M vs. enterprise value at $190.38M (implies a LFCF/EV ratio at 16.68%).
THLD has been working on drug delivery technology intended to cut off oxygen to tumors, in particular the TH-302 hypoxia-focused drug, which is intended to focus on small sections while sparing the nearby healthy tissue. As reported by Yahoo! Finance Street Authority, these new cancer-fighting measures are still in development, but the fact that a similar drug produced by competitor Celgene (CELG) was recently rejected by the FDA, means THLD has an opportunity to corner this segment of the market.
*EPS and LFCF data sourced from Yahoo! Finance, accounting and DuPont analysis data sourced from Google Finance, ROIC data sourced from Market In Out, all other data sourced from Finviz.