Bet On These 5 Profitable Stocks To Boost Your Returns

One of the best tools to measure the future performance of a company’s stocks is profitability analysis. Profitability analysis helps us measure a company’s ability to generate ample sales revenue not only to meet all operating and non-operating expenses, but also to generate sufficient returns for the investors. This makes a profitable company a preferred choice over loss-making ones.

However, positive returns are never guaranteed for a company with weak fundamentals, no matter how profitable it is. Despite these hurdles, several studies have indicated that a company with high profitability normally generates attractive returns.

One of the most suitable ways of evaluating a company’s profitability position is by using financial ratio analysis. Here, we have used one of the most widely used and effective profitability ratios, net income ratio.

Net Income Ratio

Profitability ratios are of four types, which are gross income ratio, pretax profit margin, operating income ratio and net income ratio. Here we have chosen net profit ratio as it helps understand the bottom line of a company.

Net income ratio is measured by dividing net income by total sales revenue. High net income ratio means that a company can effectively meet all its business-related expenses and still generate ample funds from its total sales revenue.

Screening Parameters

Net income ratio by itself may fail to indicate future winners. As such, we have added a few additional criteria to arrive at a winning strategy.

Zacks Rank equal to #1: Only Strong Buy stocks are allowed. With the Zacks Rank proving itself to be one of the best rating systems out there, this is a great way to start things off.

12-Month Trailing Sales and Net Income Growth Higher than X Industry: Stocks that possess higher sales and net income growth in the last 12 months showcase better financial performance.

12-Month Trailing Net Income Ratio Higher than X Industry: High net income ratio indicates a company’s solid profitability.

% Rating Strong Buy greater than 70%: This indicates that 70% of the analysts covering these stocks are optimistic.

Here are 5 of the 12 stocks that qualified the screen:

Align Technology Inc. (NASDAQ:ALGN) designs, manufactures and markets the Invisalign System, a proprietary method for treating malocclusion. This Zacks Rank #1 company has an average four-quarter earnings surprise of 10.5%.

Nxstage Medical, Inc. (NASDAQ:NXTM) is a medical device and technology company. This Zacks Rank #1 company has an average four-quarter earnings surprise of 35.6%.

Air Lease Corporation (NYSE:AL) is an aircraft leasing company. This Zacks Rank #1 company has an average four-quarter earnings surprise of 36.9%.

Tahoe Resources Inc. (NYSE:TAHO) is engaged in the exploration and development of mineral properties in the United States for the mining of gold, silver, copper, etc. This Zacks Rank #1 company has an average four-quarter earnings surprise of 60%.

Ring Energy, Inc. (NYSE:REI) is engaged in the exploration and production of oil and gas. This Zacks Rank #1 company has an average four-quarter earnings surprise of 8.3%.

While backtesting over a two-year timeframe (July 04, 2014 to July 01, 2016), a portfolio following this strategy provided a total return of 23.1% compared with the S&P 500’s return of 5.9%. Thus, this strategy may prove profitable for those looking to beat the markets.

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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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