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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 created a universe of the 200 largest stocks by market cap, screened for those stocks rallying above their 20-day, 50-day, and 200-day moving averages, and then ran DuPont analysis on those stocks.

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

List sorted by market cap.

1. QUALCOMM Incorporated (NASDAQ:QCOM): Engages in the development, design, manufacture, and marketing of digital wireless telecommunications products and services. Market cap of $90.15B. The stock is currently trading at 6.25% above its 20-Day SMA, 3.36% above its 50-Day SMA, and 0.67% above its 200-Day SMA. MRQ Net Profit Margin increased to 28.57% from 28.41% year-over-year, Sales/Assets increased to 0.10 from 0.09, while Assets/Equity decreased to 1.34 from 1.48. The stock has had a good month, gaining 12.42%.

2. Visa, Inc. (NYSE:V): Operates retail electronic payments network worldwide. Market cap of $73.55B. The stock is currently trading at 6.59% above its 20-Day SMA, 7.60% above its 50-Day SMA, and 19.04% above its 200-Day SMA. MRQ Net Profit Margin increased to 43.28% from 35.29% year-over-year, Sales/Assets increased to 0.07 from 0.06, while Assets/Equity decreased to 1.32 from 1.33. The stock has had a good month, gaining 12.13%.

3. American Express Company (NYSE:AXP):
Provides charge and credit payment card products, and travel-related services worldwide. Market cap of $58.11B. The stock is currently trading at 2.99% above its 20-Day SMA, 2.52% above its 50-Day SMA, and 6.29% above its 200-Day SMA. MRQ Net Profit Margin increased to 16.24% from 13.72% year-over-year, Sales/Assets increased to 0.06 from 0.05, while Assets/Equity decreased to 8.12 from 9.91. The stock has gained 14.76% over the last year.

4. Mastercard Incorporated (NYSE:MA):
Provides transaction processing and related services to customers principally in support of their credit, deposit access, electronic cash and automated teller machine payment card programs, and travelers' cheque programs. Market cap of $44.21B. The stock is currently trading at 9.09% above its 20-Day SMA, 12.49% above its 50-Day SMA, and 31.68% above its 200-Day SMA. MRQ Net Profit Margin increased to 36.47% from 33.55% year-over-year, Sales/Assets increased to 0.1847 from 0.1837, while Assets/Equity decreased to 1.65 from 1.81. The stock has had a couple of great days, gaining 8.05% over the last week.

5. Southern Company (NYSE:SO): Operates as a utility company that provides electric service in the southeastern United States. Market cap of $36.33B. The stock is currently trading at 4.18% above its 20-Day SMA, 6.73% above its 50-Day SMA, and 12.10% above its 200-Day SMA. MRQ Net Profit Margin increased to 13.71% from 12.51% year-over-year, Sales/Assets increased to 0.0807 from 0.0788, while Assets/Equity decreased to 3.10 from 3.21. The stock has gained 18.62% over the last year.

6. Simon Property Group Inc. (NYSE:SPG): Engages in investment, ownership, and management of properties. Market cap of $34.91B. The stock is currently trading at 3.93% above its 20-Day SMA, 4.35% above its 50-Day SMA, and 11.62% above its 200-Day SMA. MRQ Net Profit Margin increased to 19.79% from 16.26% year-over-year, Sales/Assets increased to 0.0424 from 0.0390, while Assets/Equity decreased to 5.12 from 5.21. The stock has gained 25.84% over the last year.

7. Baxter International Inc. (NYSE:BAX):
Develops, manufactures, and markets products for people with hemophilia, immune disorders, infectious diseases, kidney disease, trauma, and other chronic and acute medical conditions. Market cap of $31.65B. The stock is currently trading at 4.78% above its 20-Day SMA, 2.29% above its 50-Day SMA, and 5.51% above its 200-Day SMA. MRQ Net Profit Margin increased to 17.39% from 16.75% year-over-year, Sales/Assets increased to 0.20 from 0.19, while Assets/Equity decreased to 2.54 from 2.80. The stock has gained 24.64% over the last year.

8. priceline.com Incorporated (NASDAQ:PCLN): Operates as an online travel company. Market cap of $26.45B. The stock is currently trading at 6.16% above its 20-Day SMA, 6.44% above its 50-Day SMA, and 13.56% above its 200-Day SMA. MRQ Net Profit Margin increased to 23.25% from 14.98% year-over-year, Sales/Assets increased to 0.33 from 0.31, while Assets/Equity decreased to 1.69 from 1.77. The stock has had a good month, gaining 15.83%.

*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 Mega-Cap Stocks With Strong Sources Of Profitability