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

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 large-cap stocks rallying above their 20-day, 50-day, and 200-day moving averages.

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.

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

List sorted by market cap.

1. Companhia de Bebidas Das Americas (AMBEV) (ABV): Beverages Industry. Market cap of $103.26B. Price currently 8.08% above its 20-Day SMA, 5.02% above its 50-Day SMA, and 13.15% above its 200-Day SMA. MRQ Net Profit Margin increased from 26.96% to 31.83%, Sales/Assets increased from 0.15 to 0.16, while Assets/Equity decreased from 1.78 to 1.73. The stock has had a couple of great days, gaining 5.81% over the last week.

2. Duke Energy Corporation (NYSE:DUK): Electric Utilities Industry. Market cap of $24.28B. Price currently 1.41% above its 20-Day SMA, 0.05% above its 50-Day SMA, and 3.51% above its 200-Day SMA. MRQ Net Profit Margin increased from -6.75% to 12.31%, Sales/Assets increased from 0.0583 to 0.0591, while Assets/Equity decreased from 2.67 to 2.63. The stock has gained 12.8% over the last year.

3. American Electric Power Co., Inc. (NYSE:AEP): Electric Utilities Industry. Market cap of $17.87B. Price currently 2.03% above its 20-Day SMA, 0.74% above its 50-Day SMA, and 4.61% above its 200-Day SMA. MRQ Net Profit Margin increased from 4.05% to 9.75%, Sales/Assets increased from 0.0673 to 0.0711, while Assets/Equity decreased from 3.75 to 3.63. The stock has gained 11.96% over the last year.

4. AngloGold Ashanti Ltd. (NYSE:AU): Gold Industry. Market cap of $17.49B. Price currently 6.14% above its 20-Day SMA, 7.73% above its 50-Day SMA, and 0.90% above its 200-Day SMA. MRQ Net Profit Margin increased from 14.23% to 16.95%, Sales/Assets increased from 0.12 to 0.15, while Assets/Equity decreased from 3.05 to 2.31. The stock has gained 4.99% over the last year.

5. Annaly Capital Management, Inc. (NYSE:NLY): REIT Industry. Market cap of $17.24B. Price currently 1.96% above its 20-Day SMA, 0.67% above its 50-Day SMA, and 5.77% above its 200-Day SMA. MRQ Net Profit Margin increased from -33.90% to 12.62%, Sales/Assets increased from 0.0088 to 0.0095, while Assets/Equity decreased from 7.58 to 7.2. The stock has gained 16.73% over the last year.

6. Public Service Enterprise Group Inc. (NYSE:PEG): Diversified Utilities Industry. Market cap of $16.0B. Price currently 0.94% above its 20-Day SMA, 0.26% above its 50-Day SMA, and 1.56% above its 200-Day SMA. MRQ Net Profit Margin increased from 9.49% to 13.08%, Sales/Assets increased from 0.08 to 0.09, while Assets/Equity decreased from 3.15 to 2.85. The stock has gained 4.01% over the last year.

7. CF Industries Holdings, Inc. (NYSE:CF): Agricultural Chemicals Industry. Market cap of $11.83B. Price currently 8.30% above its 20-Day SMA, 12.60% above its 50-Day SMA, and 23.23% above its 200-Day SMA. MRQ Net Profit Margin increased from 8.04% to 27.05%, Sales/Assets increased from 0.15 to 0.19, while Assets/Equity decreased from 2.28 to 1.93. The stock has gained 84% over the last year.

8. Eldorado Gold Corp. (NYSE:EGO): Gold Industry. Market cap of $10.65B. Price currently 7.74% above its 20-Day SMA, 19.09% above its 50-Day SMA, and 18.53% above its 200-Day SMA. MRQ Net Profit Margin increased from 26.99% to 29.78%, Sales/Assets increased from 0.06 to 0.07, while Assets/Equity decreased from 1.27 to 1.23. The stock has gained 5.61% 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: 8 Rallying Large Caps With Strong Sources Of Profitability