Bet on Winning DuPont Analysis & Pick 5 Top Stocks

Return on equity (ROE) is one of the most favored metrics of investors. It is a profitability ratio that measures earnings generated by a company from its equity. Investors can follow the ROE trend in companies and compare this to historical or industry benchmarks to pick a winning stock.

However, stepping beyond the basic ROE and analyzing it at an advanced level could lead to even better returns. Here is where the DuPont analysis comes into play. It is an analytical method that examines three major elements – operating management, management of assets and the capital structure – related to the financial condition of a company. Below we show how DuPont breaks down ROE into its different components:

ROE = Net Income/Equity

Net Income / Equity = (Net Income / Sales) * (Sales / Assets) * (Assets / Equity)

ROE = Profit Margin * Asset Turnover Ratio * Equity Multiplier

The screener yields winning stocks like MYR Group MYRG, Blue Bird BLBD, Guardian Pharmacy Services GRDN, Ubiquiti UI and Everus Construction Group Inc. ECG.

Why Use DuPont?

Although one can’t play down the importance of normal ROE calculation, the fact remains that it doesn’t always provide a complete picture. The DuPont analysis, on the other hand, allows investors to assess the elements that play a dominant role in any change in ROE. It can help investors to segregate companies with higher margins from those with high turnover. For example, high-end fashion brands generally survive on a high margin as compared with retail goods, which rely on higher turnover.

In fact, it also sheds light on the company’s leverage status, which can go a long way in selecting stocks poised for gains. A lofty ROE could be due to the overuse of debt. Thus, the strength of a company can be misleading if it has a high debt load.

So, an investor confined solely to an ROE perspective may be confused if he or she has to judge between two stocks of equal ratios. This is where DuPont analysis wins over and spots the better stock.

Investors can simply do this analysis by taking a look at the company’s financials.However, looking at the financial statements of each company separately can be a tedious task. Screening tools like Zacks Research Wizard can come to your rescue and help you shortlist the stocks that look impressive with a DuPont analysis.

Screening Parameters

• Profit Margin more than or equal to 3: As the name suggests, it is a measure of how profitably the business is running. Generally, it is the key contributor to ROE.

• Asset Turnover Ratio more than or equal to 2: It allows an investor to assess management’s efficiency in using assets to drive sales.

• Equity Multiplier between 1 and 3: It’s an indication of how much debt the company uses to finance its assets.

• Zacks Rank less than or equal to 2: Stocks having a Zacks Rank #1 (Strong Buy) or 2 (Buy) generally perform better than their peers in all types of market environments.

• Current Price more than $5: This screens out the low-priced stocks. However, when looking for lower priced stocks, this criterion can be removed.

Here are five out of eight stocks that made it through the screen:

MYR Group: The Zacks Rank #2 holding company of leading specialty contractors serving the electrical infrastructure market throughout the United States and Canada has the experience and expertise to complete electrical installations of any type and size. You can see the complete list of today’s Zacks #1 Rank stocks here.

The average earnings surprise of MYRG for the past four quarters is 18.55%.

Blue Bird: The Zacks Rank #2 company is engaged in the designing, engineering, manufacturing and sale of school buses and related parts.

The average earnings surprise of BLBD for the past four quarters is 23.33%.

Guardian Pharmacy Services: The Zacks Rank #1 company is a long-term care pharmacy services company that provides an extensive suite of technology-enabled services designed to help residents of long-term health care facilities.

The average earnings surprise of GRDN for the past four quarters is 10.30%.

Ubiquiti: The Zacks Rank #1 company, along with its subsidiaries, offers a comprehensive portfolio of networking products and solutions for service providers and enterprises.

The average earnings surprise of UI for the past four quarters is 55.34%.

Everus Construction Group: The Zacks Rank #2 company is providing a full spectrum of construction services through its electrical and mechanical, and transmission and distribution specialty contracting services principally in the United States.

The average earnings surprise of ECG for the past four quarters is 66.33%.

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MYR Group, Inc. (MYRG): Free Stock Analysis Report

Blue Bird Corporation (BLBD): Free Stock Analysis Report

Ubiquiti Inc. (UI): Free Stock Analysis Report

Guardian Pharmacy Services, Inc. (GRDN): Free Stock Analysis Report

Everus Construction Group, Inc. (ECG): Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

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