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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 that have seen significant net insider buying over the last six months.

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 agree with insiders on their companies? Use this list as a starting-off point for your own analysis.

List sorted by net insider purchases as a percent of share float.

1. The Hain Celestial Group, Inc. (NASDAQ:HAIN): Manufactures, markets, distributes, and sells natural and organic food, and personal care products in the United States and internationally. Market cap of $1.40B. Net insider shares purchased over the last six months at 1.23M, which is 3.72% of the company's 33.15M share float. MRQ Net Profit Margin increased to 4.40% from 3.0% year-over-year, Sales/Assets increased to 0.22 from 0.19, while Assets/Equity decreased to 1.54 from 1.56. The stock is a short squeeze candidate, with a short float at 5.81% (equivalent to 6.6 days of average volume). The stock has had a good month, gaining 20.26%.

2. Isramco Inc. (NASDAQ:ISRL): Engages in the acquisition, development, production, and exploration of onshore oil and natural gas properties in the United States. Market cap of $170.95M. Net insider shares purchased over the last six months at 15.17K, which is 1.54% of the company's 984.70K share float. MRQ Net Profit Margin increased to 11.06% from 10.18% year-over-year, Sales/Assets increased to 0.07 from 0.06, while Assets/Equity decreased to 9.06 from 10.65. The stock is a short squeeze candidate, with a short float at 5.03% (equivalent to 15.75 days of average volume). It's been a rough couple of days for the stock, losing 8.91% over the last week. The stock has had a good month, gaining 13.22%.

3. Red Robin Gourmet Burgers Inc. (NASDAQ:RRGB): Develops, operates, and franchises casual-dining restaurants in the United States and Canada. Market cap of $454.49M. Net insider shares purchased over the last six months at 34.70K, which is 0.27% of the company's 12.65M share float. MRQ Net Profit Margin increased to 3.19% from 2.15% year-over-year, Sales/Assets increased to 0.36 from 0.35, while Assets/Equity decreased to 1.9302 from 1.9346. The stock is a short squeeze candidate, with a short float at 12.57% (equivalent to 5.5 days of average volume). It's been a rough couple of days for the stock, losing 6.32% over the last week.

4. U.S. Global Investors, Inc. (NASDAQ:GROW): A publicly owned investment manager. Market cap of $109.65M. Net insider shares purchased over the last six months at 17.20K, which is 0.13% of the company's 13.09M share float. MRQ Net Profit Margin increased to 15.89% from 11.27% year-over-year, Sales/Assets increased to 0.2108 from 0.2101, while Assets/Equity decreased to 1.12 from 1.13. The stock has had a good month, gaining 10.22%.

5. Convergys Corporation (NYSE:CVG): Provides relationship management solutions worldwide. Market cap of $1.20B. Net insider shares purchased over the last six months at 122.17K, which is 0.12% of the company's 104.33M share float. MRQ Net Profit Margin increased to 5.75% from 5.19% year-over-year, Sales/Assets increased to 0.26 from 0.24, while Assets/Equity decreased to 1.73 from 1.75. The stock is a short squeeze candidate, with a short float at 6.28% (equivalent to 6.2 days of average volume). It's been a rough couple of days for the stock, losing 5.75% over the last week.

6. Alico Inc. (NASDAQ:ALCO): Operates as a land management company in central and southwest Florida. Market cap of $155.38M. Net insider shares purchased over the last six months at 3.0K, which is 0.10% of the company's 2.86M share float. MRQ Net Profit Margin increased to 15.18% from 8.05% year-over-year, Sales/Assets increased to 0.21 from 0.14, while Assets/Equity decreased to 1.68 from 1.87. The stock has gained 0.52% over the last year.

7. HEICO Corp. (NYSE:HEI): Engages in the design, manufacture, and sale of aerospace, defense, and electronic related products and services in the United States and internationally. Market cap of $2.19B. Net insider shares purchased over the last six months at 20.0K, which is 0.06% of the company's 33.99M share float. MRQ Net Profit Margin increased to 10.34% from 9.43% year-over-year, Sales/Assets increased to 0.23 from 0.20, while Assets/Equity decreased to 1.62 from 1.72. The stock is a short squeeze candidate, with a short float at 11.41% (equivalent to 22.74 days of average volume). The stock has had a good month, gaining 26.57%.

*Insider data sourced from Yahoo! Finance, accounting data sourced from Google Finance, all other data sourced from Finviz.

Source: 7 Insider Picks With Strong Sources Of Profitability