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If you are looking for momentum plays, you may find this list very interesting.

We ran a DuPont analysis of profitability for about 120 of the high-volume gainers on 5/18/11 (that is, stocks rising on relative volume greater than 1.5 - i.e. yesterday's trading volume is 50% or higher relative to the three month average daily volume).

From this analysis, we found 10 companies that passed all requirements for positive sources of return on equity. Here's the final list:

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 strong profitability is being priced into the market right now? Use this list as a starting-off point for your own analysis.

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

1. AVEO Pharmaceuticals, Inc. (AVEO): Biotechnology Industry. Market cap of $682.67M. On 5/18/11 the stock rose 3.53% on relative volume of 2.44. Return on Equity increased from -31.03% to 53.75%. When analyzing the sources of return, Net Profit Margin increased from -132.17% to 63.89%. Sales/Assets increased from 0.0956 to 0.5130, while Assets/Equity decreased from 2.4566 to 1.6398 (comparing 3 mo. ending 3/31/10 vs. 3 mo. ending 3/31/11).

2. CNH Global NV (CNH): Farm & Construction Machinery Industry. Market cap of $9.61B. On 5/18/11 the stock rose 3.75% on relative volume of 2.1. Return on Equity increased from 0.24% to 1.98%. When analyzing the sources of return, Net Profit Margin increased from 0.45% to 3.72%. Sales/Assets increased from 0.1212 to 0.1277, while Assets/Equity decreased from 4.2946 to 4.1570 (comparing 3 mo. ending 3/31/10 vs. 3 mo. ending 3/31/11). This is a risky stock that is significantly more volatile than the overall market (beta = 2.56).

3. Dice Holdings, Inc. (DHX): Staffing & Outsourcing Services Industry. Market cap of $963.33M. On 5/18/11 the stock rose 3.73% on relative volume of 1.96. Return on Equity increased from 2.21% to 3.36%. When analyzing the sources of return, Net Profit Margin increased from 12.30% to 16.44%. Sales/Assets increased from 0.1071 to 0.1241, while Assets/Equity decreased from 1.6790 to 1.6498 (comparing 3 mo. ending 3/31/10 vs. 3 mo. ending 3/31/11).

4. Georgia Gulf Corp. (GGC): Synthetics Industry. Market cap of $947.08M. On 5/18/11 the stock rose 6.85% on relative volume of 1.77. Return on Equity increased from -5.19% to 2.62%. When analyzing the sources of return, Net Profit Margin increased from -3.01% to 1.54%. Sales/Assets increased from 0.3707 to 0.4289, while Assets/Equity decreased from 4.6420 to 3.9732 (comparing 3 mo. ending 3/31/10 vs. 3 mo. ending 3/31/11).

5. Herbalife Ltd. (HLF): Drug Related Products Industry. Market cap of $3.07B. On 5/18/11 the stock rose 2.46% on relative volume of 1.57. Return on Equity increased from 13.73% to 15.09%. When analyzing the sources of return, Net Profit Margin increased from 8.38% to 11.01%. Sales/Assets increased from 0.5213 to 0.5855, while Assets/Equity decreased from 3.1411 to 2.3402 (comparing 3 mo. ending 3/31/10 vs. 3 mo. ending 3/31/11). The stock might be undervalued at current levels, with a PEG ratio at 0.73, and P/FCF ratio at 11.87.

6. Hollysys Automation Technologies, Ltd (HOLI): Industrial Electrical Equipment Industry. Market cap of $543.41M. On 5/18/11 the stock rose 1.3% on relative volume of 1.69. Return on Equity increased from 2.49% to 3.70%. When analyzing the sources of return, Net Profit Margin increased from 15.32% to 17.02%. Sales/Assets increased from 0.0937 to 0.1292, while Assets/Equity decreased from 1.7332 to 1.6826 (comparing 3 mo. ending 3/31/10 vs. 3 mo. ending 3/31/11). The stock is a short squeeze candidate, with a short float at 12.14% (equivalent to 8.66 days of average volume).

7. Contango Oil & Gas Co. (MCF): Independent Oil & Gas Industry. Market cap of $914.23M. On 5/18/11 the stock rose 4.11% on relative volume of 1.59. Return on Equity increased from 0.45% to 4.11%. When analyzing the sources of return, Net Profit Margin increased from 4.60% to 30.37%. Sales/Assets increased from 0.0644 to 0.0923, while Assets/Equity decreased from 1.5358 to 1.4652 (comparing 3 mo. ending 3/31/10 vs. 3 mo. ending 3/31/11). The stock is a short squeeze candidate, with a short float at 5.99% (equivalent to 7.28 days of average volume).

8. Photronics Inc. (PLAB): Semiconductor Industry. Market cap of $486.17M. On 5/18/11 the stock rose 5% on relative volume of 1.63. Return on Equity increased from 0.05% to 2.63%. When analyzing the sources of return, Net Profit Margin increased from 0.21% to 10.02%. Sales/Assets increased from 0.1460 to 0.1631, while Assets/Equity decreased from 1.6507 to 1.6089 (comparing 13 weeks ending 1/31/10 vs. 13 weeks ending 1/30/11). The stock is a short squeeze candidate, with a short float at 14.6% (equivalent to 6.27 days of average volume).

9. Textron Inc. (TXT): Conglomerates Industry. Market cap of $6.49B. On 5/18/11 the stock rose 0.43% on relative volume of 1.82. 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). The stock is a short squeeze candidate, with a short float at 8.4% (equivalent to 6.28 days of average volume). It's been a rough couple of days for the stock, losing 6.09% over the last week.

10. WESCO International Inc. (WCC): Industrial Equipment Wholesale Industry. Market cap of $2.28B. On 5/18/11 the stock rose 1.6% on relative volume of 1.82. Return on Equity increased from 1.87% to 3.11%. When analyzing the sources of return, Net Profit Margin increased from 1.67% to 2.61%. Sales/Assets increased from 0.4524 to 0.4848, while Assets/Equity decreased from 2.4718 to 2.4620 (comparing 3 mo. ending 3/31/10 vs. 3 mo. ending 3/31/11). The stock is a short squeeze candidate, with a short float at 14.1% (equivalent to 11.39 days of average volume).

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

Source: Wednesday's 10 High-Volume Gainers With Strong Sources of Profitability