Looking for profitable companies that show promise down the road? For this list, we explored a universe of stocks that are currently experiencing strong upward momentum and have analyst expectations for further growth in the years ahead.
To start, we collected a list of names rallying above their 20, 50, and 200-day moving average. This signals that the company is rapidly increasing in value and surrounded by positive market sentiment.
We sorted through those names for those that show promise of continuing on their upward trend. To do that, we looked at five-year earnings per share data. We screened only the names that analysts expect to grow more than 20% in the next five years.
The DuPont equation
Both of these data points indicate high growth, but these data points should not be used alone. It's important for investors to understand the sources for that growth -- is it sustainable?
With that in mind, we collected data on profitability sources. One of analysts' favorite profitability tools is DuPont analysis. It's a way to look at changes in return on equity (ROE) profitability [i.e., net income/equity] by attributing those changes to certain sources. Some of the sources are more sustainable than others, thereby giving an analysis of strength in increasing profitability.
DuPont analysis breaks up a company's ROE into three components: net margin, asset turnover, and leverage. Companies with increasing ROE along with increasing net margin, increasing asset turnover, and decreasing leverage are viewed favorably.
Companies passing all requirements are thus experiencing increasing profits due to operations and not to increased use of leverage.
Do you think these high-growth companies have strong enough profitability to rally higher and meet analyst expectations?
List sorted by change in ROE. (Click here to access free, interactive tools to analyze these ideas.)
2. Neurocrine Biosciences
3. Allot Communications
4. Golar LNG
6. Constant Contact
7. Rackspace Hosting
8. DXP Enterprises
9. OSI Systems
10. Shuffle Master
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 Rebecca Lipman does not own any of the shares mentioned above. ROE data sourced from Google Finance. All other data sourced from Finviz.