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Count on DuPont to Pick 5 Top-Ranked Healthy Stocks

Return on equity (ROE) 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, delving a little deeper into the basic ROE and analyzing it at an advanced level could lead to even better returns. Here is where the DuPont analysis excels.It is an analytical method, which 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

Importance of Using DuPont

Although one cannot brush off the importance of normal ROE calculation, the fact remains that it doesn’t always portray 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 having a high turnover. For example, high-end fashion brands generally survive on high margin as compared with retail goods, which rely on higher turnover.

And one of the ROE components – equity multiplier (explained below) – can help you judge how burdened a company is with debts. 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 ratio. This is where DuPont analysis wins over and spots the better stock.

Investors can simply do this analysis by taking a look at a company’s financials. However, looking at 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 environment.

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 of the 14 stocks that made it through the screen:

Sprouts Farmers Market Inc. SFM: This Zacks Rank #1 company is engaged in the retailing of natural and organic food primarily in the United States. Its Zacks Industry Rank is in the top 20%. You can see the complete list of today’s Zacks #1 Rank stocks here.

AllianceBernstein Holding L.P. AB: The companyprovides diversified investment management services. The stock carries a Zacks Rank #2. Its Zacks Industry Rank is in the top 29%.

Landstar System Inc. LSTR: The company is an asset-light provider of integrated transportation management solutions worldwide. Its Zacks Industry Rank is in the top 20%. The stock has a Zacks Rank #2.

Medifast Inc. MED: The company is an important manufacturer and distributor of clinically proven healthy living products and programs. The stock carries a Zacks Rank #2 and a VGM score of B. Its Zacks Industry Rank is in the top 45%.

Ross Stores Inc. ROST: Ross offers apparel, accessories, footwear and home fashions for the entire family at savings of 20% to 60% from that of department and specialty store regular prices. It has a Zacks Rank #2 and the Zacks Industry Rank is in the top 29%. The stock has a VGM Score of B.

You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.

The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.

Click here to sign up for a free trial to the Research Wizard today.

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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Landstar System, Inc. (LSTR): Free Stock Analysis Report
 
AllianceBernstein Holding L.P. (AB): Free Stock Analysis Report
 
Sprouts Farmers Market, Inc. (SFM): Free Stock Analysis Report
 
MEDIFAST INC (MED): Free Stock Analysis Report
 
Ross Stores, Inc. (ROST): Free Stock Analysis Report
 
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