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Investors eye businesses that generate profits on a regular basis. In order to gauge the extent of profits, there is no better metric than net profit margin.

A higher net margin underlines a company’s efficiency in translating sales into actual profits. Moreover, this metric lends an insight into how well a company is run and the headwinds weighing on it. Louisiana-Pacific Corporation (LPX - Free Report), PDC Energy, Inc. (PDCE - Free Report), Encore Wire Corporation (WIRE - Free Report), and CONSOL Energy (CEIX - Free Report) boast solid net profit margins.

Net Profit Margin = Net profit/Sales * 100.

In simple terms, net profit is the amount a company retains after deducting all costs, interest, depreciation, taxes, and other expenses. In fact, the net profit margin can turn out to be a potent point of reference to gauge the strength of a company’s operations and its cost-control measures.

Also, higher net profit is essential for rewarding stakeholders. Further, strength in the metric attracts investors and draws well-skilled employees, who eventually enhance business value.

Moreover, a higher net profit margin compared with its peers provides the 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, net profit margin as an investment criterion has its share of pitfalls. The metric varies widely from industry to industry. While net income is a key metric for investment measurement in traditional industries, it is not that important for technology companies.

In addition, the difference in accounting treatment of various items — especially non-cash expenses like depreciation and stock-based compensation — makes comparison a daunting task.

Furthermore, for companies preferring to grow with debt instead of equity funding, higher interest expenses usually weigh on net profit. In such cases, the measure is rendered ineffective while analyzing a company’s 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 74 stocks that qualified the screen:

Louisiana-Pacific (LPX)

Louisiana-Pacific is a leading manufacturer of sustainable, quality engineered wood building materials, structural framing products as well as exterior siding for use in residential, industrial, and light commercial construction. The company currently sports a Zacks Rank of 1 and has a VGM Score of A.

The Zacks Consensus Estimate for Louisiana-Pacific’s 2022 earnings has been revised upward to $11.87 per share from $8.54 in the past 30 days. LPX surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average surprise being 13.3%.

PDC Energy (PDCE)

PDC Energy is an independent upstream operator engaged in the exploration, development, and production of natural gas, crude oil, and natural gas liquids. At present, the stock has a Zacks Rank #1 and a VGM Score of A.

The Zacks Consensus Estimate of $13.32 for PDC Energy’s current-year earnings has moved 29.1% north in the past 30 days. PDCE surpassed the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 47.3%.

Encore Wire (WIRE)

Encore Wire is a low-cost manufacturer of copper electrical building wire and cable. The company is a significant supplier of both residential wire for interior electrical wiring in homes, apartments, and manufactured housing, as well as building wire for electrical distribution in commercial and industrial buildings. Encore Wire sports a Zacks Rank of 1, at present, and has a VGM Score of A.

The Zacks Consensus Estimate for Encore Wire’s 2022 earnings has been revised upward to $10.74 per share from $9.76 in the past 60 days. WIRE surpassed the Zacks Consensus Estimate in the trailing four quarters, the average surprise being 298.1%.

CONSOL Energy (CEIX)

CONSOL Energy is a leading provider of title insurance, specialty insurance, and claims management services. The company sports a Zacks Rank of 1 at present and has a VGM Score of A.

The Zacks Consensus Estimate for CONSOL Energy’s 2022 earnings has been revised upward to $11.73 from $8.09 in the past 30 days. CEIX surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while missing the same on one occasion, the average beat being 85.7%.