Many investors use fundamentals such as earnings or book value to gauge a company's stock, but technical factors can add a totally new dimension to your analysis.
Technical analysis incorporates price and volume data and is used by investors to try and predict stock behavior. One such technical signal is the "golden cross," in which a stock's 50-day moving average crosses above its 200-day MA, indicating recent upside momentum that may persist.
DuPont Analysis
Of course, fundamental analysis is still important.
One way to analyze a company's profitability is with DuPont analysis of return on equity (ROE). DuPont analyzes ROE (or net income/equity) by breaking ROE up into three components:
ROE
= (Net Profit/Equity)
= (Net Profit/Sales)*(Sales/Assets)*(Assets/Equity)
= (Net Profit Margin)*(Asset Turnover)*(Leverage Ratio)
We therefore focus on companies with the following positive characteristics: Increasing ROE along with,
- Decreasing leverage, i.e., decreasing Asset/Equity ratio
- Improving asset use efficiency (i.e., increasing Sales/Assets ratio) and improving net profit margin (i.e., increasing Net Income/Sales ratio)
Companies with all of these characteristics are experiencing increasing profits due to operations and not to increased use of financial leverage.
Investing ideas
We combined these ideas and ran a stock screen to illustrate them. We began by screening for stocks recently exhibiting the Golden Cross. We then ran DuPont analysis on those stocks to find those with strong sources of increasing profitability.
Do you think these companies are performing well? Use this list as a starting point for your own analysis.
List sorted by market cap. (Click here to access free, interactive tools to analyze these ideas.)
1. Chevron (NYSE: CVX ) : Engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. Market cap of $198.49B. SMA50 at $101.38 vs. SMA200 at $100.27 (current price at $99.67). MRQ net margin increased to 12.15% from 7.58% y/y, MRQ sales/assets increased to 0.32 from 0.28 y/y, while MRQ assets/equity decreased to 1.69 from 1.73 y/y.
2. Pfizer (NYSE: PFE ) : Offers prescription medicines for humans and animals worldwide. Market cap of $162.50B. SMA50 at $19.35 vs. SMA200 at $19.26 (current price at $21.14). MRQ net margin increased to 21.74% from 5.41% y/y, MRQ sales/assets increased to 0.09 from 0.08 y/y, while MRQ assets/equity decreased to 2.1781 from 2.1842 y/y
3. Merck (NYSE: MRK ) : Provides various health solutions through its prescription medicines, vaccines, biologic therapies, animal health, and consumer care products. Market cap of $110.82B. SMA50 at $33.70 vs. SMA200 at $33.22 (current price at $36.36). MRQ net margin increased to 14.07% from 3.07% y/y, MRQ sales/assets increased to 0.11 from 0.10 y/y, while MRQ assets/equity decreased to 1.93 from 1.94 y/y.
4. SAP (NYSE: SAP ) : Provides business software primarily in Europe, the Middle East, Africa, the Americas, and the Asia Pacific Japan region. Market cap of $68.89B. SMA50 at $58.22 vs. SMA200 at $58.16 (current price at $56.11). MRQ net margin increased to 36.73% from 16.65% y/y, MRQ sales/assets increased to 0.1605 from 0.1573 y/y, while MRQ assets/equity decreased to 1.87 from 2.08 y/y.
5. American Express (NYSE: AXP ) : Provides charge and credit payment card products, and travel-related services worldwide. Market cap of $53.92B. SMA50 at $47.94 vs. SMA200 at $47.80 (current price at $46.42). MRQ net margin increased to 15.16% from 14.41% y/y, MRQ sales/assets increased to 0.0548 from 0.0519 y/y, while MRQ assets/equity decreased to 8.22 from 9.17 y/y.
6. Union Pacific (NYSE: UNP ) : Provides rail transportation services in North America. Market cap of $47.72B. SMA50 at $97.63 vs. SMA200 at $95.92 (current price at $98.79). MRQ net margin increased to 17.72% from 17.65% y/y, MRQ sales/assets increased to 0.11 from 0.10 y/y, while MRQ assets/equity decreased to 2.43 from 2.47 y/y.
7. Tyco International (NYSE: TYC ) : Provides security products and services, fire protection and detection products and services, valves and controls, and other industrial products to customers worldwide. Market cap of $20.74B. SMA50 at $45.28 vs. SMA200 at $45.17 (current price at $44.90). MRQ net margin increased to 8.53% from 5.92% y/y, MRQ sales/assets increased to 0.18 from 0.17 y/y, while MRQ assets/equity decreased to 1.89 from 1.93 y/y.
8. Williams Companies (NYSE: WMB ) : Engages in finding, producing, gathering, processing, and transporting natural gas primarily in the United States. Market cap of $17.92B. SMA50 at $29.76 vs. SMA200 at $28.96 (current price at $30.40). MRQ net margin increased to 10.06% from -54.91% y/y, MRQ sales/assets increased to 0.1034 from 0.0964 y/y, while MRQ assets/equity decreased to 3.31 from 3.39 y/y.
9. TELUS (NYSE: TU ) : Provides telecommunications products and services primarily in Canada. Market cap of $16.94B. SMA50 at $49.82 vs. SMA200 at $49.30 (current price at $52.20). MRQ net margin increased to 12.57% from 12.54% y/y, MRQ sales/assets increased to 0.13 from 0.12 y/y, while MRQ assets/equity decreased to 2.50 from 2.60 y/y.
10. Continental Resources (NYSE: CLR ) : Engages in the exploration and production of crude oil and natural gas primarily in the north, south, and east regions of the United States. Market cap of $11.20B. SMA50 at $62.76 vs. SMA200 at $62.12 (current price at $62.03). MRQ net margin increased to 45.32% from 17.81% y/y, MRQ sales/assets increased to 0.19 from 0.07 y/y, while MRQ assets/equity decreased to 2.11 from 2.67 y/y.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Alexander Crawford does not own any of the shares mentioned above. Accounting data sourced from Google Finance, all other data sourced from Finviz.
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