Seeking Alpha
Value, growth, long-term horizon, medium-term horizon
Profile| Send Message|
( followers)  

One idea in the search for potentially undervalued stocks is screening recently negative performers for those with strong sources of increased profitability year-over-year.

In order to determine the sources of profitability, we ran a DuPont analysis of return on equity for companies with negative performance for the latest quarter. In this analysis we searched for those that have seen positive trends in quarterly ROE year-over-year.



We broke the ROE equation into three parts:

ROE
= (Net Profit/Equity)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
= (Net Profit margin)*(Asset turnover)*(Leverage ratio)

All of the stocks mentioned below have seen rising ROE values for the recent quarter, year-over-year. Then we wanted to analyze the sources of these returns, so we narrowed down the original universe to only focus on companies with the following characteristics:

- Decreasing leverage, i.e. decreasing Asset/Equity ratio
- Improving asset use efficiency (i.e. declining Sales/Assets ratio) and improving net profit margin (i.e. declining Net Income/Sales ratio)

Companies passing all requirements are thus experiencing increasing profits due to operations and not to increased use of leverage.

Do you think this recent underperformance is warranted? Use this list as a starting-off point for your own analysis.

List sorted by increase in quarterly ROE year-over-year.

1. American International Group, Inc. (NYSE:AIG): Property & Casualty Insurance Industry. Market cap of $55.43B. The stock has lost -23.54% over the last quarter. Return on Equity increased from -12.71% to 12.96%. When analyzing the sources of return, Net Profit Margin increased from -47.79% to 50.97%. Sales/Assets increased from 0.0219 to 0.0317, while Assets/Equity decreased from 12.1389 to 8.0104 (comparing 3 mo. ending 12/31/09 vs. 3 mo. ending 12/31/10).



2. General Motors Company (NYSE:GM): Auto Manufacturer. Market cap of $50.23B. The stock has lost -11.81% over the last quarter. Return on Equity increased from -12.17% to 3.89%. When analyzing the sources of return, Net Profit Margin increased from -10.64% to 3.81%. Sales/Assets increased from 0.2372 to 0.2655, while Assets/Equity decreased from 4.8251 to 3.8391 (comparing 3 mo. ending 12/31/09 vs. 3 mo. ending 12/31/10).



3. KLA-Tencor Corporation (NASDAQ:KLAC):
Semiconductor Equipment & Materials Industry. Market cap of $7.30B. The stock has lost -0.39% over the last quarter. Return on Equity increased from 2.57% to 7.85%. When analyzing the sources of return, Net Profit Margin increased from 11.92% to 25.15%. Sales/Assets increased from 0.1262 to 0.1875, while Assets/Equity decreased from 1.7079 to 1.6645 (comparing 3 mo. ending 3/31/10 vs. 3 mo. ending 3/31/11). The stock has gained 25.77% over the last year.



4. Harley-Davidson, Inc. (NYSE:HOG): Recreational Vehicles Industry. Market cap of $8.86B. The stock has lost -4.70% over the last quarter. Return on Equity increased from 1.60% to 5.10%. When analyzing the sources of return, Net Profit Margin increased from 2.76% to 9.74%. Sales/Assets increased from 0.1128 to 0.1302, while Assets/Equity decreased from 5.1274 to 4.0189 (comparing 3 mo. ending 3/28/10 vs. 3 mo. ending 3/27/11).

5. Weyerhaeuser Co. (NYSE:WY)
: REIT. Market cap of $12.14B. The stock has lost -1.87% over the last quarter. Return on Equity increased from -0.49% to 2.11%. When analyzing the sources of return, Net Profit Margin increased from -1.41% to 6.27%. Sales/Assets increased from 0.0935 to 0.1162, while Assets/Equity decreased from 3.7506 to 2.8881 (comparing 13 weeks ending 3/31/10 vs. 13 weeks ending 3/31/11).

6. Xerox Corp. (NYSE:XRX):
Business Equipment Industry. Market cap of $14.16B. The stock has lost -4.44% over the last quarter. Return on Equity increased from -0.36% to 2.19%. When analyzing the sources of return, Net Profit Margin increased from -0.89% to 5.14%. Sales/Assets increased from 0.1542 to 0.1771, while Assets/Equity decreased from 2.6520 to 2.4000 (comparing 3 mo. ending 3/31/10 vs. 3 mo. ending 3/31/11). The stock has lost 6.99% over the last year.

7. Mosaic Co. (NYSE:MOS):
Agricultural Chemicals Industry. Market cap of $32.82B. The stock has lost -9.18% over the last quarter. Return on Equity increased from 2.63% to 4.94%. When analyzing the sources of return, Net Profit Margin increased from 12.85% to 24.48%. Sales/Assets increased from 0.1411 to 0.1506, while Assets/Equity decreased from 1.4504 to 1.3383 (comparing 3 mo. ending 2/28/10 vs. 3 mo. ending 2/28/11). The stock has gained 44.76% over the last year.

8. PACCAR Inc. (NASDAQ:PCAR): Trucks & Other Vehicles Industry. Market cap of $19.40B. The stock has lost -5.82% over the last quarter. Return on Equity increased from 1.34% to 3.42%. When analyzing the sources of return, Net Profit Margin increased from 3.06% to 5.89%. Sales/Assets increased from 0.1594 to 0.2170, while Assets/Equity decreased from 2.7471 to 2.6791 (comparing 3 mo. ending 3/31/10 vs. 3 mo. ending 3/31/11). The stock has gained 12.01% over the last year.

9. Arch Coal Inc. (NYSE:ACI): Industrial Metals & Minerals Industry. Market cap of $5.46B. The stock has lost -1.79% over the last quarter. Return on Equity increased from 0.07% to 2.14%. When analyzing the sources of return, Net Profit Margin increased from 0.21% to 5.72%. Sales/Assets increased from 0.1499 to 0.1712, while Assets/Equity decreased from 2.2886 to 2.1813 (comparing 3 mo. ending 12/31/09 vs. 3 mo. ending 12/31/10). The stock has gained 27.88% over the last year.

10. Skyworks Solutions Inc. (NASDAQ:SWKS): Semiconductor Industry. Market cap of $5.69B. The stock has lost -3.75% over the last quarter. Return on Equity increased from 2.44% to 4.31%. When analyzing the sources of return, Net Profit Margin increased from 11.43% to 18.16%. Sales/Assets increased from 0.1761 to 0.2076, while Assets/Equity decreased from 1.2141 to 1.1436 (comparing 3 mo. ending 1/1/10 vs. 3 mo. ending 12/31/10). The stock has had a couple of great days, gaining 8.36% over the last week.

11. Sunoco, Inc. (NYSE:SUN): Oil & Gas Refining & Marketing Industry. Market cap of $5.06B. The stock has lost -1.13% over the last quarter. Return on Equity increased from 1.02% to 2.86%. When analyzing the sources of return, Net Profit Margin increased from 0.30% to 0.85%. Sales/Assets increased from 0.7307 to 0.7695, while Assets/Equity decreased from 4.6519 to 4.3654 (comparing 3 mo. ending 12/31/09 vs. 3 mo. ending 12/31/10). The stock has gained 29.31% over the last year.

12. Goodrich Corp. (NYSE:GR):
Aerospace/Defense Products & Services Industry. Market cap of $10.97B. The stock has lost -2.69% over the last quarter. Return on Equity increased from 3.77% to 5.44%. When analyzing the sources of return, Net Profit Margin increased from 6.56% to 10.27%. Sales/Assets increased from 0.1942 to 0.1975, while Assets/Equity decreased from 2.9585 to 2.6824 (comparing 3 mo. ending 3/31/10 vs. 3 mo. ending 3/31/11). The stock has gained 15.84% over the last year.

13. Eaton Corporation (NYSE:ETN): Industrial Electrical Equipment Industry. Market cap of $18.09B. The stock has lost -0.95% over the last quarter. Return on Equity increased from 2.32% to 3.69%. When analyzing the sources of return, Net Profit Margin increased from 5.00% to 7.55%. Sales/Assets increased from 0.1958 to 0.2194, while Assets/Equity decreased from 2.3712 to 2.2275 (comparing 3 mo. ending 3/31/10 vs. 3 mo. ending 3/31/11). The stock has gained 39.08% over the last year.

14. Textron Inc. (NYSE:TXT): Conglomerates Industry. Market cap of $7.16B. The stock has lost -1.37% over the last quarter. Return on Equity increased from -0.28% to 0.95%. When analyzing the sources of return, Net Profit Margin increased from -0.36% to 1.17%. Sales/Assets increased from 0.1220 to 0.1646, while Assets/Equity decreased from 6.3745 to 4.9341 (comparing 3 mo. ending 4/3/10 vs. 3 mo. ending 4/2/11). This is a risky stock that is significantly more volatile than the overall market (beta = 2.73). The stock is a short squeeze candidate, with a short float at 9.56% (equivalent to 7.42 days of average volume). The stock has gained 10.73% over the last year.

*Accounting data sourced from Google Finance, all other data sourced from Finviz.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Rebound Ideas: 14 Underperforming Stocks With Encouraging Profits