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A company’s profitability can come from more than one source, and some are preferred over others. This is why an analysis beyond the top and bottom-line numbers is important when choosing stocks.

One way to analyze sources of profitability is with DuPont analysis of return on equity (ROE) profitability.ROE can be broken up into three components such, that increases 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. To illustrate this analysis, we ran DuPont on stocks currently priced under $5.

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 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 to enlarge]

Do you think these companies have attractive sources of profitability? Use this list as a starting-off point for your own analysis.

List sorted by market cap.

1. Alcatel-Lucent (ALU): Communication Equipment Industry. Market cap of $8.01B. Price at $3.26. MRQ net profit margin has increased to 1.10% from -4.83% one year ago, MRQ Sales/Assets has increased to 0.18 from 0.15, and MRQ Assets/Equity has decreased to 6.49 from 10.30. This is a risky stock that is significantly more volatile than the overall market (beta = 2.49). The stock has performed poorly over the last month, losing 38.17%.

2. SIRIUS XM Radio Inc. (SIRI): Broadcasting Industry. Market cap of $7.11B. Price at $1.75. MRQ net profit margin has increased to 23.28% from 2.18% one year ago, MRQ Sales/Assets has increased to 0.1019 from 0.0972, and MRQ Assets/Equity has decreased to 14.77 from 39.91. It's been a rough couple of days for the stock, losing 13.04% over the last week.

3. Brocade Communications Systems, Inc. (BRCD): Data Storage Devices Industry. Market cap of $1.68B. Price at $3.37. MRQ net profit margin has increased to 5.02% from 4.47% one year ago, MRQ Sales/Assets has increased to 0.15 from 0.14, and MRQ Assets/Equity has decreased to 1.71 from 1.87. The stock is currently stuck in a downtrend, trading 37.7% below its SMA20, 45.18% below its SMA50, and 43.33% below its SMA200. It's been a rough couple of days for the stock, losing 32.11% over the last week.

4. Graphic Packaging Holding Company (GPK): Packaging & Containers Industry. Market cap of $1.60B. Price at $3.89. MRQ net profit margin has increased to 2.97% from -3.16% one year ago, MRQ Sales/Assets has increased to 0.23 from 0.22, and MRQ Assets/Equity has decreased to 4.44 from 6.59. This is a risky stock that is significantly more volatile than the overall market (beta = 2.13). Might be undervalued at current levels, with a PEG ratio at 0.86, and P/FCF ratio at 7.76. It's been a rough couple of days for the stock, losing 11.99% over the last week.

5. Strategic Hotels & Resorts, Inc. (BEE): REIT. Market cap of $874.0M. Price at $4.83. MRQ net profit margin has increased to 23.11% from -22.42% one year ago, MRQ Sales/Assets has increased to 0.10 from 0.07, and MRQ Assets/Equity has decreased to 2.57 from 3.12. This is a risky stock that is significantly more volatile than the overall market (beta = 2.8). The stock is a short squeeze candidate, with a short float at 6.07% (equivalent to 5.53 days of average volume). It's been a rough couple of days for the stock, losing 20.89% over the last week.

6. Great Panther Silver Ltd (GPL): Silver Industry. Market cap of $407.18M. Price at $3.08. MRQ net profit margin has increased to 45.34% from 12.37% one year ago, MRQ Sales/Assets has increased to 0.23 from 0.19, and MRQ Assets/Equity has decreased to 1.14 from 1.49. It's been a rough couple of days for the stock, losing 16.94% over the last week.

7. Charming Shoppes Inc. (CHRS): Apparel Stores Industry. Market cap of $373.16M. Price at $2.88. MRQ net profit margin has increased to 5.16% from 0.77% one year ago, MRQ Sales/Assets has increased to 0.47 from 0.43, and MRQ Assets/Equity has decreased to 2.44 from 2.51. This is a risky stock that is significantly more volatile than the overall market (beta = 3.42). The stock is a short squeeze candidate, with a short float at 8.58% (equivalent to 7.21 days of average volume). It's been a rough couple of days for the stock, losing 15.08% over the last week.

8. Wabash National Corp. (WNC): Trucks & Other Vehicles Industry. Market cap of $353.56M. Price at $4.98. MRQ net profit margin has increased to 1.15% from -3.74% one year ago, MRQ Sales/Assets has increased to 0.71 from 0.55, and MRQ Assets/Equity has decreased to 2.98 from 4.43. This is a risky stock that is significantly more volatile than the overall market (beta = 2.17). The stock is a short squeeze candidate, with a short float at 13.62% (equivalent to 6.38 days of average volume). It's been a rough couple of days for the stock, losing 24.78% over the last week.

9. Smart Balance, Inc (SMBL): Processed and Packaged Goods Industry. Market cap of $305.31M. Price at $4.91. MRQ net profit margin has increased to 5.64% from -239.31% one year ago, MRQ Sales/Assets has increased to 0.1327 from 0.1264, and MRQ Assets/Equity has decreased to 1.3967 from 1.3999. The stock has had a couple of great days, gaining 10.68% over the last week.

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

Source: 9 Stocks Under $5 With Strong Sources of Profitability