High gross margins.
At some point I came to rely on net profit margins vs. operating margins, and I've gone with that. I have assumed that they are either correlated or related in a way that when analyzing a company, either metric is okay. Perhaps now I should look more closely at testing that assumption, esp. for high gross margin companies. I'll have to try to find some of Mr. Silk's work.
In my portfolios/watch list I don't spot any stocks that now have operating margins of over 50%. It's not a metric I can sort on. (I see RIG at 45%, Visa (V) at 47%.) That 50% figure seems exceptionally high to me now. I see several in the 25-30% area and these result in net profit margins in the 20% plus range.
I always want to be attuned to outliers and the reasons for them. With very very high margins (whether gross margins or net), one has to wonder if they're sustainable. To bring home so much profit to the bottom line on every sales dollar, is as attractive as a honey pot to a bear. (Which would be competitors, potential new market entrants, gov't taxation authorities, maybe organized employees).
There are many people I'd say who have a requirement in their definition of "growth stock" that it is, or it includes, growth in sales: can't be a growth stock if sales aren't growing. In this case, it seems to me a situation that would almost be too good: sales growth and for every dollar of sales, "huge" profits from that sale. I should be leery of blithely applying a formula in this case (or anywhere else maybe), and ought to instead or in addition, look behind the numbers. |
