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One very helpful way to analyze the profitability of a company is to use DuPont analysis of return on equity (ROE).

ROE can be broken up into three components such that changes in ROE can be attributed to those components.

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

Analyzing the sources of returns for a company, we can focus on companies with the following characteristics: Increasing ROE along with,

  • Decreasing leverage, i.e. decreasing Asset/Equity ratio

  • Improving asset use efficiency (i.e. increasing Sales/Assets ratio) and improving net profit margin (i.e. increasing Net Income/Sales ratio)

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

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the top six stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.

We used DuPont's analysis on a universe of stocks with significantly rising net profit margin, comparing the trailing-twelve-month margin to the company’s 5-year average. From this universe of stocks with strong sources of profitability, we searched for those stocks that have also seen significant net institutional buying over the current quarter.

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 index over the last month. To access a complete analysis of this list's recent performance, click here.

Click chart to enlarge:



Do you think these companies are performing well? Use this list as a starting-off point for your own analysis.

List sorted by net institutional shares purchased as a percent of share float.

  1. Atlas Pipeline Partners LP (NYSE:APL): Oil & Gas Pipelines Industry. Market cap of $1.77B. Trailing twelve month (TTM) net profit margin at 21.62% vs. 5-year average at -18.27%. Net profit margin improved from 0.23% to 93.59%, Sales/Assets improved from 0.11 to 0.13, while Assets/Equity decreased from 2.68 to 1.48. Institutional investors have been net buyers of 4.2M shares, which represents 10.31% of the company's 40.73M share float. The stock has gained 215.25% over the last year.

  2. Nanometrics Incorporated (NASDAQ:NANO): Scientific & Technical Instruments Industry. Market cap of $428.46M. TTM net profit margin at 28.41% vs. 5-year average at -11.36%. Net profit margin improved from 15.93% to 16.91%, Sales/Assets improved from 0.24 to 0.26, while Assets/Equity decreased from 1.36 to 1.27. Institutional investors have been net buyers of 1.7M shares, which represents 9.94% of the company's 17.10M share float. It's been a rough couple of days for the stock, losing 9.2% over the last week.

  3. AVEO Pharmaceuticals, Inc. (NASDAQ:AVEO): Biotechnology Industry. Market cap of $709.49M. TTM net profit margin at 24.46% vs. 5-year average at -178.33%. Net profit margin improved from -132.17% to 63.89%, Sales/Assets improved from 0.10 to 0.51, while Assets/Equity decreased from 2.46 to 1.64. Institutional investors have been net buyers of 2.2M shares, which represents 8.19% of the company's 26.87M share float. The stock has gained 205.04% over the last year.

  4. Tejon Ranch Co. (NYSE:TRC): Property Management Industry. Market cap of $720.06M. TTM net profit margin at 25.94% vs. 5-year average at 5.61%. Net profit margin improved from -32.52% to 38.59%, Sales/Assets improved from 0.02 to 0.07, while Assets/Equity decreased from 1.33 to 1.23. Institutional investors have been net buyers of 1.0M shares, which represents 8.16% of the company's 12.25M share float. The stock has had a couple of great days, gaining 5.03% over the last week.

  5. Great Panther Silver Ltd (NYSEMKT:GPL): Silver Industry. Market cap of $511.19M. TTM net profit margin at 33.55% vs. 5-year average at -32.78%. Net profit margin improved from 12.37% to 45.34%, Sales/Assets improved from 0.19 to 0.23, while Assets/Equity decreased from 1.49 to 1.14. Institutional investors have been net buyers of 7.4M shares, which represents 5.76% of the company's 128.46M share float. Exhibiting strong upside momentum--currently trading 13.01% above its SMA20, 22.24% above its SMA50, and 39.68% above its SMA200. The stock has had a couple of great days, gaining 6.89% over the last week.

*TTM and 5-year net profit margin data sourced from Screener.co, 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: 5 Stocks With Rising Profitability and Strong Institutional Buying