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.
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:
= (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.
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.)
5. American Express
6. Union Pacific
7. Tyco International
8. Williams Companies
10. Continental Resources
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.