4 Solid Net Profit Margin Stocks to Boost Portfolio Returns

Investors seek companies that consistently generate profits. One of the best metrics to measure profitability is the net profit margin. This metric highlights a company's ability to convert sales into actual profits, providing insights into operational efficiency and management quality. Castle Biosciences, Inc. CSTL, Qifu Technology, Inc. QFIN, Euroseas Ltd. ESEA and Strategic Education, Inc. STRA boast solid net profit margins.

Net Profit Margin = Net profit/Sales * 100.

Net profit represents the amount retained after all expenses, including costs, interest, depreciation and taxes. A strong net profit margin indicates effective cost control and operational strength, which are crucial for rewarding stakeholders and attracting investors and talented employees. Moreover, a higher net profit margin compared to peers provides a company with a competitive edge.

Pros and Cons

Net profit margin helps investors gain clarity on a company’s business model in terms of pricing policy, cost structure and manufacturing efficiency. Hence, a strong net profit margin is preferred by all classes of investors.

However, this metric varies across industries, making direct comparisons challenging. While it is vital for traditional industries, it might be less relevant for technology companies.

Differences in accounting practices, especially with regard to non-cash expenses like depreciation and stock-based compensation, further complicate comparisons. Additionally, companies that rely heavily on debt may show lower net profits due to high interest expenses, limiting the metric's effectiveness in evaluating performance.

The Winning Strategy

A healthy net profit margin and solid EPS growth are the two most sought-after elements in a business model.

Apart from these, we have added a few criteria to ensure maximum returns from this strategy.

Screening Parameters

Net Margin 12 months – Most Recent (%) greater than equal to 0: High net profit margin indicates solid profitability.

Percentage Change in EPS F(0)/(F-1) greater than equal to 0: It indicates earnings growth.

Average Broker Rating (1-5) equal to 1: A rating of #1 indicates brokers’ extreme bullishness on the stock.

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

VGM Score of A or B: Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 or 2, offer the best upside potential.

Here we discuss our four picks from the 30 stocks that qualified the screen:

Castle Biosciences is a commercial-stage provider of testing solutions for the diagnosis and treatment of dermatologic cancer. It is focused on providing physicians and patients with clinically actionable genomic information. The stock currently sports a Zacks Rank of 1 and has a VGM Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Castle Biosciences’ 2024 bottom line has been revised upward to earnings of 34 cents from a loss of 8 cents per share projected 30 days ago. CSTL surpassed the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 172.7%.

Qifu Technology is a credit-tech platform based principally in China that provides a comprehensive suite of technology services to assist financial institutions, consumers and small and medium enterprises in the loan lifecycle, ranging from borrower acquisition, preliminary credit assessment, fund matching and post-facilitation services. The stock sports a Zacks Rank of 1 at present and a VGM Score of A.

The Zacks Consensus Estimate for Qifu Technology’s 2024 earnings has been revised downward to $5.71 per share from $5.04 in the past 30 days. QFIN surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while matching the same on one occasion, the average surprise being 12.4%.

Euroseas was formed under the laws of the Republic of the Marshall Islands to consolidate the ship-owning interests of the Pittas family of Athens, Greece, which has been in the shipping business for the past 136 years. It operates in the dry cargo, dry bulk and container shipping markets. The stock sports a Zacks Rank of 1 at present and has a VGM Score of B.

The Zacks Consensus Estimate for Euroseas’ 2024 earnings has been revised upward by 18 cents to $15.24 per share in the past 30 days. ESEA surpassed the Zacks Consensus Estimate twice in the trailing four quarters while missing the same on two occasions, the average surprise being 20.9%.

Strategic Education, through its subsidiaries Strayer University and New York Code and Design Academy (NYCDA), provides a range of post-secondary education and other academic programs in the United States. The stock currently carries a Zacks Rank of 2 and has a VGM Score of B.

The Zacks Consensus Estimate for Strategic Education’s 2024 earnings has been revised upward by 3 cents to $4.79 per share in the past 30 days. STRA surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 40.4%.

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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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