If you are of the belief that a good management team is essential for a company to succeed, you are not alone. Many analysts are interested in management teams.
The following is a list of companies with excellent management teams -- judged by trends in the return on assets [ROA] and return on equity [ROE] ratios over the last 12 months. To further refine the quality of the list, we had a look at institutional activity and identified the set of stocks that have seen the most significant net purchases over the last month.
All of the companies mentioned below have market caps above $300 million. They have also seen trailing twelve month [TTM] ROE and ROA accelerate faster than the prior TTM period. In addition, all of the companies below have TTM ROA and ROE values above 10%.
Tools of the trade for budding investors
Let's review the terms used above and how they can be valuable tools in identifying stocks for your portfolio.
Return-on-Equity (ROE): There is a common saying that goes: "It takes money to make money." Return-on-Equity (ROE) is a widely used measure of how good a company is at turning investors' money into even more money. It gauges a company's profitability. ROE is the amount of net income relative to the value of shareholders' equity.
ROE = Net Income / Shareholder's Equity
(Shareholders' equity is the amount the company has from stock shares, calculated as the company's total assets - total liabilities)
Return on Assets (ROA): This is an indicator of how profitable a company is relative to its total assets. It's a widely used measure of how efficient management is at using assets to generate earnings.
ROA = Net Income / Total Assets
Trailing 12 months (TTM) is an indication that the calculated data has come from the last twelve months. In this article we look at the company's TTM ROE and ROA and compare them with their prior TTM ROE and ROA (meaning from 12-24 months ago).
Institutional investors are also known as "big money" investors or managers. They represent big pools of money such as investment banks, pension funds, mutual funds, hedge funds, endowment funds, etc. When they invest in stocks, they can invest hundreds of thousands of dollars or more at one time. These transactions, called "block trades," can have a significant effect on share prices.
Because institutional investors handle such large amounts of money, it is easy enough to assume that the big money managers know what they are doing -- or at the very least know more than the average investor. This is why these investors are also sometimes referred to as "smart money."
If institutional investors start investing in a company, regular investors can assume that some of the most talented analysts and money managers expect the company's share prices to increase over time. The stocks on our list are experiencing significant investment from big money.
Smart money seem to think the upside potential of these stocks outweigh the downside -- do you agree? Use the list below as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)
1. Alliance Holdings
2. Gulfport Energy
3. Questcor Pharmaceuticals
5. j2 Global Communications
6. Acme Packet
7. Credit Acceptance
10. Bio-Reference Laboratories
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.
Disclosure: Kapitall's Becca Lipman does not own any of the shares mentioned above. Data sourced from Screener.co and Finviz.
The Motley Fool owns shares of Bio-Reference Laboratories. Motley Fool newsletter services have recommended buying shares of MercadoLibre and Acme Packet. Motley Fool newsletter services have recommended writing covered calls in Synaptics. Motley Fool newsletter services have recommended shorting MercadoLibre.
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