5 Momentum Plays With Strong Sources of Profitability

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 |  Includes: G, NIHD, NLC, SAPE, SPTN
by: Kapitall

If you like to chase momentum stocks, you may be interested in this list.

We wanted to look at stocks exhibiting the “golden cross,” i.e. the bullish technical crossover of the 50-day moving average crossing above the 200-day average. From that universe of stocks, we then searched for those with strong profitability.

We performed a DuPont analysis of return on equity for these “golden cross” stocks. From this analysis, we found 8 companies that passed all requirements for positive sources of change in return on equity 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.

We also created a price-weighted index of the stocks mentioned below, and monitored the performance of the list relative to the S&P 500 (NYSEARCA:SPY) index over the last month. To access a complete analysis of this list's recent performance, click here.

Do you think these stocks will keep rising? Use this list as a starting-off point for your own analysis.

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

Nalco Holding Co. (NYSE:NLC): Synthetics Industry. Market cap of $3.84B. SMA50 at $27.62, SMA200 at $27.58 (current price at $27.71). Return on Equity increased from 5.25% to 13.58%. When analyzing the sources of return, Net Profit Margin increased from 2.63% to 11.06%. Sales/Assets increased from 0.19 to 0.20, while Assets/Equity decreased from 10.51 to 6.14 (comparing 3 mo. ending 3/31/10 vs. 3 mo. ending 3/31/11). The stock has gained 27.4% over the last year.

Spartan Stores Inc. (NASDAQ:SPTN): Food Wholesale Industry. Market cap of $378.89M. SMA50 at $15.35, SMA200 at $15.22 (current price at $16.78). Return on Equity increased from 1.18% to 2.54%. When analyzing the sources of return, Net Profit Margin increased from 0.58% to 1.36%. Sales/Assets increased from 0.74 to 0.76, while Assets/Equity decreased from 2.75 to 2.46 (comparing 12 weeks ending 3/27/10 vs. 12 weeks ending 3/26/11). The stock is a short squeeze candidate, with a short float at 6.15% (equivalent to 16.71 days of average volume). The stock has had a good month, gaining 15.8%.

NII Holdings Inc. (NASDAQ:NIHD): Wireless Communications Industry. Market cap of $7.21B. SMA50 at $40.96, SMA200 at $40.94 (current price at $42.34). Return on Equity increased from 1.73% to 2.78%. When analyzing the sources of return, Net Profit Margin increased from 3.78% to 5.96%. Sales/Assets increased from 0.17 to 0.18, while Assets/Equity decreased from 2.69 to 2.59 (comparing 3 mo. ending 3/31/10 vs. 3 mo. ending 3/31/11). The stock has gained 19.13% over the last year.

Sapient Corp. (NASDAQ:SAPE): Business Software & Services Industry. Market cap of $1.99B. SMA50 at $12.41, SMA200 at $12.11 (current price at $14.46). Return on Equity increased from 1.58% to 2.60%. When analyzing the sources of return, Net Profit Margin increased from 3.25% to 4.87%. Sales/Assets increased from 0.35 to 0.39, while Assets/Equity decreased from 1.39 to 1.37 (comparing 3 mo. ending 3/31/10 vs. 3 mo. ending 3/31/11). The stock has had a good month, gaining 16.33%.

Genpact Ltd. (NYSE:G): Management Services Industry. Market cap of $3.59B. SMA50 at $15.42, SMA200 at $15.30 (current price at $16.25). Return on Equity increased from 2.09% to 2.29%. When analyzing the sources of return, Net Profit Margin increased from 9.77% to 10.93%. Sales/Assets increased from 0.16 to 0.17, while Assets/Equity decreased from 1.34 to 1.23 (comparing 3 mo. ending 3/31/10 vs. 3 mo. ending 3/31/11).

*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.