It's one thing to know if a company is profitable or how profitable it is. It's another thing to know where those profits are coming from. Company profits come from many different sources, with some better than others. For a closer look, one idea is the Du Pont analysis of return on equity (ROE).
To demonstrate this, we ran the Du Pont analysis on stocks that are currently being highly shorted, with float shorts above 20%. This indicates that short sellers believe these names will underperform. We then ran Du Pont analysis of ROE profitability to find those with strong sources of profitability.
Du Pont analyzes ROE, or net income/equity profitability by breaking ROE up into three components:
= (Net Profit/Equity)
= (Net profit/Sales)*(Sales/Assets)*(Assets/Equity)
= (Net Profit margin)*(Asset turnover)*(Leverage ratio)
It therefore focuses on companies with the following positive 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 with all of these characteristics are experiencing increasing profits due to operations and not to increased use of financial 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 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 deserve to be so highly shorted? Use this list as a starting point for your own analysis.
- Accretive Health, Inc. (AH): Provides end-to-end healthcare revenue cycle management services and population health management services to hospitals and healthcare providers in the United States. Float short at 30.54%. MRQ net profit margin at 5.07% vs. 3.25% y/y. MRQ sales/assets at 0.714 vs. 0.647 y/y. MRQ assets/equity at 1.53 vs. 1.84 y/y.
C&J Energy Services, Inc. Commo (NYSE:CJES): Provides specialty equipment services for oil and natural gas exploration and production companies in the Texas, Louisiana, and Oklahoma regions of the United States. Float short at 74.54%. MRQ net profit margin at 24.26% vs. 16.9% y/y. MRQ sales/assets at 0.409 vs. 0.379 y/y. MRQ assets/equity at 1.361 vs. 2.066 y/y.
The Children's Place Retail Stores, Inc. (NASDAQ:PLCE): Operates as a children's specialty apparel retailer in North America. Float short at 23.56%. MRQ net profit margin at 6.96% vs. 6.91% y/y. MRQ sales/assets at 0.554 vs. 0.518 y/y. MRQ assets/equity at 1.441 vs. 1.51 y/y.
Polypore International Inc. (NYSE:PPO): Develops, manufactures, and markets microporous membranes used in separation and filtration processes. Float short at 23.81%. MRQ net profit margin at 13.82% vs. 10.45% y/y. MRQ sales/assets at 0.129 vs. 0.126 y/y. MRQ assets/equity at 2.967 vs. 3.573 y/y.
Boston Beer Co. Inc. (NYSE:SAM): Produces and sells alcohol beverages primarily in the United States, Canada, Europe, Israel, the Caribbean, the Pacific Rim, and Mexico. Float short at 23.47%. MRQ net profit margin at 12.52% vs. 10.51% y/y. MRQ sales/assets at 0.521 vs. 0.448 y/y. MRQ assets/equity at 1.475 vs. 1.561 y/y.
Saks Incorporated (NYSE:SKS): Operates fashion retail stores in the United States. Float short at 28.12%. MRQ net profit margin at 4.% vs. 2.88% y/y. MRQ sales/assets at 0.435 vs. 0.404 y/y. MRQ assets/equity at 1.764 vs. 1.842 y/y.
Vera Bradley Designs, Inc. (NASDAQ:VRA): Engages in the design, production, marketing, and retail of functional accessories for women under the Vera Bradley brand. Float short at 55.78%. MRQ net profit margin at 10.7% vs. 6.55% y/y. MRQ sales/assets at 0.538 vs. 0.518 y/y. MRQ assets/equity at 2.178 vs. 3.538 y/y.
*Accounting data sourced from Yahoo! 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.