If I’m looking for a stock to hold long-term, one aspect that’s more important to me than growth and valuation metrics is profitability. If a company can’t stay profitable, it’s not something I’d like to hold long-term. There are various metrics to measure profits, such as net profit margin and return on assets, but my personal favorite is return on invested capital (ROIC).
Also referred to as return on capital, ROIC is used to assess a company’s efficiency at allocating capital to profitability. In other words, it measures how much profit a company can generate for every dollar invested in the company. The higher the figure, the more profit a company makes. It effectively tells us how competitive a company is in its industry. For instance, if a company has a high ROIC, it most likely has an economic moat, which refers to a business’ ability to sustain its competitive advantage.
A company is creating value as long as it’s ROIC is higher than 2%, though that’s the bare minimum. Levels above 10% are considered good, and over 15% reflect a company with a sustainable advantage. To find profitable companies for the long-term, I limited my selection to stocks with an ROIC of over 20%. Here are four companies worth a look: Logitech International (LOGI), Crocs, Inc. (CROX), Hologic, Inc. (HOLX), and Artisan Partners Asset Management Inc. (APAM).
Logitech International (LOGI)
LOGI is a Switzerland-based provider of personal computer and mobile accessories for navigation, video communication, collaboration, smart home, and other applications. The stay-at-home trend boosted sales due to an increase in orders. In addition, the company’s thriving cloud-based video conferencing services is serving as a key growth catalyst.
The company has also been benefiting from a strong performance from its Gaming and Video Collaboration units. The rising adoption of new mobile platforms in traditional and emerging markets fuels demand for LOGI’s peripherals and accessories. The company has seen strong momentum in its new products, which should further boost revenue.
Plus, its partnerships with cloud providers Zoom Video (ZM), Microsoft (MSFT), and Google (GOOG) should also add to growth. The stay-at-home trend continues to be advantageous for the company as its products benefit from more employees working from home. LOGI has introduced several new innovative products to grab a greater market share.
The company has a sky-high ROIC of 55.1% and a return on equity of 44.5%. The stock is rated a Strong Buy in our POWR Ratings system. It also holds a grade of A for every POWR component, including Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. The stock is ranked #11 in the Technology – Hardware industry.
Crocs, Inc. (CROX)
CROX designs and sells casual lifestyle footwear accessories for men, women, and children. The company is known for its clog material and offers various footwear products such as sandals, wedges, flips, and slides.
Even amidst the pandemic, the company has performed well due to brand strength and strong cash flow. In the most recent reported quarter, its revenues increased 15.7% year over year. Strong sales in North and South America and in emerging markets drove revenue growth. The company also saw strong demand for products such Clogs, Sandals, and Jibbitz.
The company also saw its adjusted gross margin increase to 57.4% due to higher prices and less marketing costs. This led to a rise in operating income. Management expects revenue to grow between 20% and 25% this year. CROX is also making progress in its omni-channel capabilities. The company saw a 36.3% year over increase in digital sales in the third quarter.
CROX has an ROIC of 26.1% and a return on equity of 65.6%. It is rated a Buy in our POWR Ratings system. It holds a grade of A for Trade Grade and a B for Peer Grade and Industry Rank. The stock is also ranked #28 in the Fashion & Luxury industry.
Hologic, Inc. (HOLX)
HOLX was previously known for creating products for women’s healthcare needs. Its acquisition of Gen-Probe, though, put a greater emphasis on commercial diagnostics. Its recent growth in Diagnostic revenues is being driven by strong demand for its COVID-19 related products. The company has generated robust sales from strong customer adoption of HOLX’s two SARS-CoV-2 tests.
Last May, the company received the FDA’s Emergency Use Authorization (EUA) for its Aptima SARS-CoV-2 assay to test for COVID-19. Then in October, the FDA amended this authorization to test asymptomatic individuals with or without symptoms. The company received the FDA’s EUA for its Panther Fusion SARS-CoV-2 assay to test asymptomatic individuals in the previous month.
The company should see higher revenue as more testing amps up. Its international sales have also served as a growth driver for the company. In the fourth quarter, international revenues for the Diagnostics segment rose 260.3%, driven by Molecular Diagnostics. HOLX has been focused on commercial infrastructure. For instance, in Europe, the company has signed contracts in numerous countries due to its installed base of Panthers.
The stock has an ROIC of 21.8% and a return on equity of 41.2%. HOLX is rated a Buy in our POWR Ratings system. It holds a grade of A for Trade Grade and Industry Rank, and a B for Buy & Hold Grade. It is also the #52 ranked stock in the Medical – Devices & Equipment industry.
Artisan Partners Asset Management Inc. (APAM)
APAM is a global investment management firm that provides a range of investment strategies to a diverse group of clients worldwide. Its investment management services are primarily offered to institutions through separate accounts and mutual funds, including long-only equity investment strategies.
The company’s revenue is derived from fees on client assets, so it grows through new client assets and asset growth in client accounts. APAM has been able to grow assets by hiring top talent and servicing its clients’ needs by offering them a range of proprietary and external investment options. In the third quarter, APAM’s revenues rose by 14.8% to $233 million from $203 million in the same quarter in the previous year.
APAM has also been generating strong cash flow. In the first three quarters of 2020, the company generated $299 million in operating cash flows and paid out half in dividends. As its profits increase, its cash flows rise, and the APAM rewards its shareholders through dividends. In fact, the company has a 5.4% dividend yield that had increased 27.7% over the past year.
The stock also has a high ROIC of 40.3 and a really high return on equity of 110.5%. APAM is rated a Buy in our POWR Ratings system. It holds a grade of A for Trade Grade and a B for Buy & Hold and Industry Rank. It is also ranked #78 in the large asset management industry.
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LOGI shares . Year-to-date, LOGI has gained 10.28%, versus a 1.00% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More…
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