Ten of the highest profitability stocks in the FTSE 350

Wednesday, May 08 2019 by
29
Ten of the highest profitability stocks in the FTSE 350

Hugely profitable companies have a habit of achieving cult-like status in the stock market.For those that catch them early, they can be life-changing. For many of the rest of us, they’re the ones that got away… because they just seemed too expensive at the time.

The appeal of these stocks is often very clear. Profitable companies are those that are likely to have the best chances of protecting themselves through the economic cycle. They often have robust brands and strong customer loyalty. And they are able to operate and grow very efficiently, which means they can drive and compound shareholder returns over the long term.

They’re the kind of stocks you imagine Warren Buffett taking a shine too. They’ve got those elusive moat-like qualities; profits driven by rock-solid competitive advantages that it’s hard to see anyone breaking own.

The price of these stocks, of course, can be extreme. Highly profitable companies are naturally popular in the market and that makes them appear expensive (especially in bull markets). These are the classic hallmarks of what we call at Stockopedia, High Flyers. Stong quality and blistering momentum can be a potent blend over long periods - but it can be a pricey party to attend for anyone arriving late.

A profitability checklist

With this in mind, here’s a quick-fire checklist of possible profitability measures (by no means exhaustive) for use in a strategy looking for financial firepower.

One of the most popular measures of profitability is to look at how much bang a company gets from the pounds it invests in itself. This is called return on capital employed - or ROCE. A high return on capital can be a signpost to stocks with strong and defensible brands and franchises that can be rolled out very profitably.

Another signpost to strong profitability is the percentage that a company keeps from selling its products after all costs have been deducted. This is known as the operating margin. High margins are often a hallmark of companies that can command high prices from their customers and have strong competitive advantages.

Competitive advantage is also something that can be examined by looking at what’s known as return on equity. This is the technical term for comparing a company’s net income to all the cash that investors have put into it. It’s a popular way of comparing the profitability of…

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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested. ?>


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Rightmove plc is a United Kingdom-based company, which operates as a property portal. The Company's principal business is the operation of the rightmove.co.uk Website. The Company's Website and mobile platforms provide online property search. The Company's segments include Agency, New Homes and Other. The Agency segment provides resale and lettings property advertising services on www.rightmove.co.uk. The New Homes segment provides property advertising services to new home developers and housing associations on www.rightmove.co.uk. The Other segment consists of overseas and commercial property advertising services and non-property advertising services, which include its third-party and consumer services, as well as data and valuation services. The Company offers its services through estate agents, lettings agents, new homes developers and overseas homes agents offering properties outside the United Kingdom but interested in advertising to the United Kingdom-based home hunters. more »

LSE Price
512.2p
Change
-1.0%
Mkt Cap (£m)
4,602
P/E (fwd)
24.8
Yield (fwd)
1.4



  Is LON:RMV fundamentally strong or weak? Find out More »


3 Comments on this Article show/hide all

Nick Ray 9th May 1 of 3
4

When I looked at your screen I see it is just:

  • Mkt Cap > 0 (redundant)
  • ROCE %  > 10 (redundant)
  • Mkt Cap > 15 (redundant)
  • Index contains FTSE 350
  • Sort by ROCE %

so effectively just FTSE-350 and sort by ROCE %. Not sure if you intended to originally do a bit more with the other metrics you mentioned and changed your mind. (Also: it took nearly a minute to 'duplicate'. Why on earth are screener operations so slow when they are the lifeblood of the site?)

However, seeing Rightmove (LON:RMV) with a ROCE of 799% and an ROE of 1078% made me realise I either don't understand ROE and ROCE as well as I thought, or there is something deeply odd about RMV.

If an ROE of 15% is considered desirable, that sounds about right in an intuitive sort of way in terms of how well a company is generating income from its capital base.

But what do we make of a ROCE of 799% (in other words about "nine times" CE in a single year)? Surely such a company would be 9x bigger so next year it should grow another 9x and so on. Clearly that is not happening so the "CE" part must be failing to benefit in future years from the income. Where is all that cash going?

So do we need to look at "rate of change of ROCE" instead of ROCE to get an idea how well a company is performing? It seems some companies get very flattering ROCE figures by having a tiny denominator for the purposes of the calculation.

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stocko616 9th May 2 of 3
1

I’m guessing that Ben’s full screen is up the creek? Fcf/sales does not appear.

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andrea34l 10th May 3 of 3
6

As always, shouldn't a screen like this be used as an initial gathering of stocks for further investigation?

As per the other comments, I do consider that some of the ratios returned are simply nonsensical. I don't have any accounting background, but surely ROCE of 799% is simply impossible! Perhaps I should spend time number crunching to see what I think the numbers should really be... but isn't this a key function of what Stockopedia is supposed to be for?

I tend to think that I don't understand how to value stocks but, as per a comment I put on one of Ben's other posts, I can easily find reasons not to invest in many of these companies:

  • Plus500 (LON:PLUS) - the share price has dropped off a cliff, with one trading warning after the next.
  • 888 Holdings (LON:888) - the price chart is not good at all, and gaming legislation is getting tighter and tighter, including very recent industry announcements; personally, every time I see an advert for a gaming company on the TV I want to be sick... but that's just me, I guess my morals may be too strict.
  • Hargreaves Lansdown (LON:HL.) - at the interim stage, profits were up 4% and assets under admin down 6%; Morgan Stanley subsequently cut its price target to 1775. How can a future PER of almost 40 possibly be justified with numbers like this? On the plus side, I use HL for managing my funds and I rate the site well, however I am VERY sceptical of the funds that they recommend in their "Wealth 50" choice, as my own sector analysis highlights that the performance of several is RUBBISH!
  • I figure Auto Trader (LON:AUTO) are boosted by the ahead of expectations update... but is a PER of 26 sensible considering profit/eps growth was last reported at half that number?
  • Rightmove (LON:RMV) have risen well since their finals... even though underlying growth of 10% is the lowest they have achieved in 9 years. They are now on a future PER of 26... :-/

...and I could go on I suppose in this manner. On the other hand, I do like (and hold) Softcat (LON:SCT) as, compared to all I have mentioned, their growth is significantly higher... and in fact at the interim stage diluted eps was up just over 40%, and yet the future PER is only 26! On the surface of it, this looks excellent value.

Personally I think this screen needs to have a lot more criteria to make it usable. If one looks at the next 15 companies in the screen we have a very mixed bag, with what I consider to be some good companies (such as Pagegroup (LON:PAGE) which I hold, and have recently announced upbeat trading; JD Sports Fashion (LON:JD.) which I alas don't hold, and have done phenomenally well) and some extremely poor-performing companies (such as ITV (LON:ITV) which announced a very subdued update, and total catastrophe Indivior (LON:INDV) which has lost 90% of its value in a year).

At this stage I am of the view that this screening exercise is a waste of time as it stands and, at the least, needs significant refinement.

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