I introduced the subject of Net Profit Margin, NPM, two weeks ago because first quarter earnings reports were quite good, but that wasn't good enough for many analysts...they were looking for signs of better sales growth. Everyone knows that sales growth is vital to a company's long-term viability. Increased sales normally lead to rising earnings which, in turn, drive a company's stock price higher and higher. So the best situation is one in which a company has a positive NPM and rising sales and earnings.

So I created a search in which NPM was > 0.00 and EPS and SPS were both higher than they were 39 weeks ago. My first test found 1,115 such stocks, as of yesterday's close. They showed an average Price increase of 8.34% since 12/31/09 with 788 winners, 320 losers and seven unchanged. I then ran a test in which NPM was negative and EPS and SPS were falling. I was certain these stocks would have been destroyed. But they were not. I found 754 stocks which showed an average Price increase of 13.63%, with 460 winners, 275 losers and 19 with no change. I was surprised at these results, to say the least. So what's going on?

I didn't know, but I did see that the average Price of the stocks in my first test was $29.57 per share and that of the second test was only $5.40. This could be the difference maker since we have seen, time-and-time again, that low-priced stocks pop the most in a rally. When I adjusted the search to disallow stocks less than $1.00, I found 557 stocks with an average Price of $7.03 per share. They gained only 12%, but this was still better than I had expected.

Undaunted, I still believed that stocks with positive profit margins should outperform those with negative margins. So I decided to change the searches I used above so that I could study the effects of NPM Deltas. Without going through all the gory details, I was truly shocked by what I found. This search found 236 stocks as of yesterday's close that have gained an average of 20.90% since 12/31/09, with 163 winners and 73 losers. Yes, the average Price was relatively low at $6.24 per share, but these results tell me a story.

The world loves a fighter who comes off the mat and wins the match. Think about Ford Motor Company. You could have taken it for dead 15 months ago, but they turned things around. Their NPM may have been negative but it was on the way to recovery. Ford's making money right now and its stock is doing just fine. A lot of the stocks found by this search never will make money, but those that do, will soar. I added the search to the Net Profit Margin Group in the UniSearch tool. I call it "The Comeback Kids."

P.S. I still prefer to own stocks of companies with positive NPM and rising EPS and SPS, but if you like to bet on underdogs, this search is for you.

CHEERING FOR THE COMEBACK KIDS.
Many of these stocks may be down, but they're not out as you will be able to see from the great results that are possible with "The Comeback Kids." Mr. Steve Chappell, Director of Educational Services, will be tonight's promoter, trainer and referee in managing these lightweights. So join Steve at the VectorVest University to see this week's exciting "Strategy of the Week" presentation: "Cheering for the Comeback Kids."

We have many wonderful User Groups within our network, but several of them have fallen prey to unfortunate incidents over the last few months. If anything like what I cite below happens at one of your User Group meetings, please let us know.

Just this morning I found an email in my box which said, "Just got a call from a customer, Mr. Xx Xxxxxxx, who says he attended the yyyyyy user group and someone named Zzzz Zzzzzz was hawking his stock advice service for $1000/yr. Xx says that Zzzzzz claimed he can tell with 80% accuracy the move the market will make 3 months before it happens. Xx did say that other group members mentioned that had the User Group Leader known about this ahead of time he would not have been allowed in." Since receiving this information, I have learned that the User Group Leader was caught by surprise by the "guest" speaker and cut him short and would not continue the meeting until the "guest" speaker left. This is a case where the User Group Leader took control of the situation and we appreciate it.

Several weeks ago, I got a call from one of our long-term User Group Leaders who said that he had been solicited twice to attend an Options Webinar. Shortly thereafter, another User Group Leader got an email from a User Group Leader promoting the same Webinar. A link to register for the Webinar was included in the email, so I clicked on it and registered for the Webinar. Without any exaggeration, this was the most pathetic options presentation I had ever seen. And there was our deviant User Group Leader, pimping for the options service. Needless to say, he is no longer a VectorVest User Group Leader.

Then there is the case of a Money Manager serving as a User Group Leader. We got a call from one of the attendees at one of his meetings who said he had been solicited by this guy to manage his money. Here, again, the Money Manager is no longer a VectorVest User Group Leader.

Finally, there have been several instances lately in which presentations have been made by individuals who are using VectorVest to promote their own interests. They have not only misused our proprietary information, but they also wanted to steal our customers! We actually had a guy give a presentation to a User Group recently who created a website in which he was trying to sell Market Timing calls based upon our Timing System. We've run into this type of thing over and over again. In many cases, however, these renegade presenters are innocent in that they are just trying share something they think would be helpful.

So here we are with 78 User Groups located around the world and many of them are absolutely wonderful. I have met many of these User Group Leaders and I know they would never allow anything to happen in their group which was contrary to VectorVest's best interests. On the other hand, we have encountered many other individuals, such as the Money Manager cited above, who have their own agenda. That is unfortunate because VV User Groups have a very important mission to accomplish, i.e., to help members learn how to use VectorVest to make money in the stock market.

We ask our User Group Leaders to be advocates of the VectorVest system, but they don't have to carry our water. If there are legitimate criticisms of our products or services, we ask that they let us know about them. We also ask that VV User Group Leaders abide by our policies and guidelines which are spelled out in a memorandum entitled "VectorVest User Group Leader Memorandum." This memorandum is being added to the Special Reports file located in your software so that you can see exactly what we're talking about. We have emailed this memorandum to all User Group Leaders to make certain that everyone is singing from the same song sheet.

We also owe the User Group Leaders a debt of gratitude. They are volunteers, they work hard at being successful and we appreciate it. This is where you can also be helpful. Become an active member of your group. The User Group Leader shouldn't have to do everything. I urge you to participate in the discussions, ask questions, create new strategies and make presentations. You'd be amazed at how much you will learn as you prepare your talks.

VV User Groups can be fun and profitable. But even the best Leaders can't do it all by themselves and we can't correct problems we don't know about. So We Need Your Help.

HOW TO INSURE YOUR RETIREMENT WITH COVERED CALLS.
If you have been following the High Income Stocks Portfolio or using any of the other Retirement Strategies, now is the time to consider using Covered Calls to protect your positions and/or increase your income. Mr. Todd Shaffer, Manager of Research, will show us how. Please join Todd at the VectorVest University to see this week's very important "Strategy of the Week" presentation: "How to Insure Your Retirement with Cover Calls."

Net Profit Margin, NPM, which I introduced last week, shows the after tax profit that a company makes, in percent, for each dollar of sales it receives. It directly relates bottom line and top line performance in one simple figure and, therefore, is a wonderful measure of profitability.

Take La-Z-Boy, Inc., LZB, yesterday's top stock ranked by VST, for example. If I use the "Layout" function, located in the Local Tool Bar of the Stock Viewer screen, to add NPM, I see that LZB has an NPM of 2.82%. That's not so hot, but I do see that LZB does have a forecasted earnings growth rate (GRT) of 34% per year, and that's great. I can also see that Sales GRT is 6 %/yr., which isn't too bad, given the state of the current economy. What about that NPM of only 2.82%?

At the bottom of the Stock Viewer screen, I can see that LZB is in the Home(Furniture) Industry Group. This summary data shows that the average NPM for the Home(Furniture) Industry Group is only 1.18%. So LZB is doing relatively well in comparison to its competitors. The average earnings GRT for this industry is only 5 %/yr., and Sales GRT is -14 %/yr. Wow, LZB beats the industry average in every respect. Best of all, LZB is growing both the top line and the bottom line.

If I double click on the summary row at the bottom of the Stock Viewer screen, the Industry Viewer screen appears and I can see that LZB is at the top of the list since the stocks are ranked by VST Desc. When I click on the column header, indentified by (EPS/SPS)*100, I see that Tempur Pedic, TPX, comes to the top with an NPM of 13.56%, which is quite good. In fact, it's outstanding for a retailer. In any event, LZB ranks in the upper half of the 21 stocks in this group. It is also reassuring to see that LZB is ranked in the upper half of all the stocks by RV, RS, RT, GRT, EY, and GPE. So it clearly is one of the best stocks in this Industry Group.

When I look at a Standard Graph of LZB, I see that its Price has gone from $0.86 per share last March 11th to $14.93 last night. Wow, can it go higher? I hope so, I own it. Nevertheless, by un-checking RT and checking EPS, I can see that EPS has gone up nicely, from -$2.07 per share to $0.63 per share over the last 12 months. I can graph NPM by clicking on "Edit Field List," located in the lower right hand corner of the screen, scrolling down to NPM, located in the left hand box, clicking on it; then clicking on Add >, and OK. Now, I simply check NPM, and I can see that NPM goes up, right in concert with EPS.

Well, let's see. When I add Sales GRT to the graph, I can see that it, too, has gone up very nicely since last year. That's what I really like to see, rising Sales GRT, rising EPS and rising NPM. No wonder LZB has done so well over the past year. Want to have some fun? Take a look at a graph of Apple Inc., AAPL. Its EPS has been rising rapidly, its Sales GRT is a fabulous 32 %/yr., and its NPM is a nifty 23.22%.

I'm not done writing about NPM yet because there's a lot more we can learn from it. Until next week, then, I suggest that you analyze your stocks through the prism of NPM. You'll see A Whole New Dimension.

BETTING ON 5-DAY DERBY WINNERS.
Two weeks ago, we decided to report the 5-Day Winners from the VectorVest RealTime Derby instead of the Daily Winners. Was it a good idea to show you the 5-Day Derby Winners instead of something else? Ms. Angel Clark has the answer to this question and would love to have you join her at the VectorVest University to see this week's scintillating "Strategy of the Week" presentation: "Betting on 5-Day Derby Winners."

About 30 years ago, I was in charge of a billion dollar business that was largely involved with a commodity, plastic. We were the world's leading producer of this plastic, making over two billion pounds a year. In order to cut costs, the business was integrated back to its basic raw materials that came right out of the ground. In fact, the plastic was called Geon, which was derived from the word Geo, of the earth.

In running this business, the name of the game was to produce a quality product at the lowest possible cost. Just do the math. One cent taken two billion times is $20,000,000. Our goal was to continue to be the world's low-cost producer and we worked very hard at it. But cost reduction alone wasn't enough to make a good profit. You also needed pricing power, which was impossible to get during a recession like we had in the early 80's.

Yes, I remember the early eighties very well...they were so reminiscent of what we have today. Cost cutting is king and pricing power is nowhere in sight. Last quarter's profits are deemed to be good, but investor's want to see sales growth because you can't cut costs forever. But, hey, all businesses aren't commodity businesses. There are companies out there that make specialty products, have pricing power and good profit margins. Who are they and how do you find them?

You use VectorVest, of course. All you have to do is create the following parameter: 100*(EPS/SPS), by using the Custom Field Builder. The 100 converts the ratio EPS/SPS from a fraction to a percentage. Since EPS is the forecasted Earnings Per Share and SPS is Sales Per Share, the new parameter gives you the Net Profit Margin, NPM, in percent. Let's see how well it works. (Dan Misch will show you how to create this parameter as an addendum to tonight's "Strategy of the Week" presentation).

You may recall from my November 10, 2006 essay, "How I Use Stock Viewer," that I like to use Stock Viewer to explore the extremes of all the various indicators and parameters in our database, so I put our new parameter into Stock Viewer and sorted by 100*(EPS/SPS) Desc. A stock called Targa Resources, NGLS, popped to the top of the list as of March 4, 2010. I took a look at its graph and it's beautiful. Wow, it has an NPM of 2,400%. Are you kidding me? VectorVest showed an EPS of $1.20 per share and SPS of $0.05 per share. So the math is OK. What about the data?

I clicked on News at the top of the Stock Viewer screen and a page from Yahoo!Finance popped up. I immediately saw that NGLS was a Limited Partnership, LP, so I was prepared to see some bizarre stuff...but nothing like I actually saw. I clicked on Key Statistics; then scrolled down to Income Statement. It showed that NGLS had Revenue of minus $1.52 billion and EPS of $0.66 per share over the last 12 months. VectorVest shows Sales of $3,180,000 and forecasted earnings of $1.20 per share. So who's right? I think VectorVest is, but if Yahoo!Finance is right, they ought to send whoever is running Targa to Congress.

Next I set the date in Stock Viewer to March 10, 2009, i.e., the day we saw the market explode from the Bear market bottom. I sorted by 100*(EPS/SPS) Desc., and ran a Quick Test from 03/10/09 to yesterday's close. It was up 118.42% with eight winners and two losers. Not bad, but the big winner was a $0.30 stock, which I didn't like. So I created a Derby Ready Strategy that I called NPM Analyzer and I put it into a new Group called Net Profit Margin. I ran the search as of 03/10/09; then ran a Quick Test through yesterday's close. It was up 65.07% with 100% winners. The big winner was Baidu.com, up 214.41%. Hmm, maybe, I have something here. I set the search date to 03/17/09, the first day we got a Green light after the March bottom and ran the test. Uh-oh. It was up only 29.93%. So I tried it on 03/26/09, when we got a C/Up signal. The result was better, up only 38.16%, but still somewhat disappointing.

I figured I had to adjust the search to return better stocks. So I set VST > 1.25 as one of the criteria and tried that. This search returned a better quality of stocks, but its overall performance was substantially worse than before. Out of curiosity, I decided to sort by 100*(EPS/SPS) Asc., instead of Desc. Remarkably, I got much better results with gains of 57.38%, 123.36% and 107.18%. Unbelievable! I then began to pick dates at random. In every test I ran, the Asc., sort beat the Desc., sort. What was going on?

I thought of Mr. Carlton Lutts, former editor of The Cabot Market Letter. He loved to pick stocks that were unknown, not yet making any money but were expected to. Many of his picks would sky rocket; then crash. When that happened he would say the love affair was over. He said that stocks were romanced before they started making money; then the accountants took over when they finally started to make money and they plunged. In honor of good, old Carlton, I called the revised Strategy, Romancing the NPM.

WINNING BIG, THE EASY WAY: FOLLOW UP.
We got so many questions regarding last week's "Strategy of the Week" that we decided to clarify exactly how those phenomenal results were obtained. We want you to know exactly how to use the 5-Day Derby Winners because it could be very big if it fulfills its promise. So join Mr. Dan Misch at the VectorVest University to see this week's very important "Strategy of the Week" presentation: "Winning Big, The Easy Way: Follow Up."