When a business is doing particularly well in comparison to their industry competitors investors want to find out why.
To identify some particularly profitable firms in the apparel stock sector and analyze the underlying causes we searched for names with the following characteristics:
1. We began with names in the apparel sector paying dividend yields above 1%. Since company profits fund the dividend, we then screened for those with strong sources of profitability. To do this we ran the DuPont analysis.
DuPont analyzes return on equity (net income/equity) profitability 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) It therefore focuses 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. 2. After checking for profitability, we explore a reason they could be doing better. We screened for those stocks with encouraging sales trends and higher growth in revenue than inventory year-over-year, as well as inventory comprising a smaller portion of current assets over the same time period. To understand why these trends are positive, think why the opposite trends would be negative. If a company sees higher growth in inventory than revenue, it may indicate that the company is having trouble selling its inventory. This is an especially valuable indicator for apparel stocks, whose inventory can quickly become dated. Business Section: Investing Ideas Below is the list of stocks from the above-mentioned ideas. All apparel firms have market caps over $50 million and are trading at over $1 per share. We also focused on stocks paying out dividend yields above 1%. We compared the profitability of the names in the list with their competitors in the industry. Then we analyzed their inventory actions for positive trends to give light to why they might be doing so well.
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