5 Efficient Stocks To Enhance Your Portfolio Return

A portfolio that seeks to provide significant exposure to securities of efficient companies is poised to perform better in any market condition. Efficiency – a company’s ability to transform its inputs into outputs – is a potential indicator of a company’s financial health. As the efficiency level of a company has a significant impact on its price performance, investing in companies with impressive levels of efficiencies may prove to be prudent investment options.

Ratios to Identify an Efficient Company

We have considered four popular ratios in order to find efficient companies that have the potential to provide impressive return.

Inventory Turnover

Inventory level is one of the key indicators of a company’s business health. While a high inventory level may indicate that the company is going through a rough patch in terms of sales, a dwindling level may indicate that the company will run out of stock in a favorable sales condition. This is where inventory turnover comes into play. It is the ratio of 12-month cost of goods sold (COGS) to a 4-quarter average inventory. Thus, a high value of the ratio indicates a low level of inventory relative to COGS, while a low ratio signals that the company has excess inventory.

Receivables Turnover

This ratio is used to measure a company’s capability to extend its credit and collect debts on the basis of that credit. Receivables turnover ratio or the “accounts receivable turnover ratio” or the “debtor’s turnover ratio” is calculated by dividing 12-month sales by four-quarter average receivables. While a high ratio may indicate that the company efficiently collects its accounts receivables or has quality customers, a low ratio may signal that the company has inefficient collection procedure or has low-quality customers or an inefficient credit policy.

Asset Utilization

This is a widely used measure of a company’s efficiency. Asset utilization indicates a company’s potential to utilize its assets. It is a ratio of total sales over the past 12 months to the last 4-quarter average of total assets. So, the higher the ratio, the greater the possibility is that the company is utilizing its assets efficiently. On the contrary, a low value of the ratio may signal that it is failing to use its assets effectively.

Operating Margin

Another popular efficiency ratio is operating margin. Operating profit margin, which is simply operating income over the past 12 months divided by sales over the same period, indicates how well a company is controlling its operating expenses. If a company has a high operating profit margin in relation to its competitors, it is doing a better job at controlling operating expenses.

All these ratios can be considered as effective measures if one compares different companies within a particular sector or industry. This is the reason why we have considered only those companies that have these ratios higher than their respective industry averages.

Screening Parameters

In addition to the above mentioned ratios, we have added a favorable Zacks Rank – Zacks Rank #1 (Strong Buy) or a Zacks Rank #2 (Buy) – to the screen with an objective to make this strategy more profitable.

Inventory Turnover, Receivables Turnover, Asset Utilization and Operating Margin greater than industry average
(Values of these ratios higher than industry averages may indicate that the efficiency level of the company is higher than its peers.)

Zacks Rankless than or equal to #2
(Only Strong Buy and Buy rated stocks can get through.)

The use of these few criteria has narrowed down the universe of over 7,700stocks to only 16.

Here are five stocks from the 16 that made it through the screen:

Lancaster Colony Corporation (NASDAQ:LANC) manufactures and markets three families of products: Glassware and Candles, Specialty Foods; and Automotive. This Zacks Rank #1 company has an average four-quarter positive earnings surprise of 10.8%.

Quidel Corp. (NASDAQ:QDEL) discovers, develops, manufactures and markets point-of-care, rapid diagnostic tests for detection of medical conditions and illnesses. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 55.1%.

Klondex Mines Ltd. (NYSE:KLDX) is focused on exploration, development and production of mineral properties. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 25%.

Honeywell International Inc. (NYSE:HON) is a diversified technology and manufacturing company, serving customers worldwide. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 0.8%.

Global Brass and Copper Holdings, Inc. (NYSE:BRSS) is a converter, fabricator, distributor and processor of copper and brass products primarily in North America. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 14.4%.

While backtesting over a two-year timeframe (July 04, 2014 to July 01, 2016), considering a four-week holding period, a portfolio following this strategy provided a total return of 19% compared with the S&P 500’s return of 5.9%. Thus this strategy may prove to be profitable for investors seeking healthy returns.

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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.

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