Margins - well, I don't have a formula approach to margins. I am more or less a black/white guy. For most companies, I want high absolute net margins (at least 10% more or less), since this indicates IMO that the company or industry has a business allowing for sustainable good profit generation. Now, it is probably a good idea to try and understand why is that and are the margins really sustainable, but that's more qualitative consideration. I discard outright most of the companies that don't have high absolute net margins. But then there are category killers such as WMT, where low margins is not an issue, it's the strength of the company. So I consider some of these as possible investments as well.
Now, I've listened to some presentations of Charlie Silk, who is a "fallen angel" small cap value investor. He emphasizes high gross margins (>50% or so). I guess his thinking is that if a company has high gross margins, it can always get profitable (again) by either growing sales and not increasing expenses or by trimming expenses. I don't really use his approach, but I wanted to throw it out into the discussion about margins. |
