When Better Profit Margins Aren’t Better

A recent article by McKinsey & Company argues that there are times when cost cutting and higher prices can hinder a company’s growth and harm its value. Offering several examples, the article argues how cost cutting can be “counterproductive, starving a company of new sources of growth and undermining performance over the long term.” Offering data from a recent study of 615 of the largest nonfinancial companies (from 2001 to 2013), the article reports that… Read More

Negative Implications of Falling Corporate Profit Margins

In his MarketWatch column, Mark Hulbert explains the distressing news buried by much of the recent positive reporting on the upward revision of GDP earlier this month. “Though the government’s upward revision of GDP growth looked positive on the surface,” he says, “a deeper look at the data shows the stock market currently is on shaky ground.” The report revealed that corporate profit margins (profits as a percentage of GDP) “experienced one of their largest… Read More

Fisher: Time To Think About Margins

With the bull market around its halfway point, in his estimation, Kenneth Fisher is focusing on “big, fat stocks” — that is, large-caps with fat gross profit margins. “It works because fat gross margins offer a firm more discretion to fine-tune its future. Invest in more research than peers do. Or market more. Or afford more capital expenditures. Or, or, or!” Fisher writes in his latest Forbes column. “It renders more reliable future earnings —… Read More

Montier Not Finding Much Safety

James Montier and GMO are known for their conservative, cautious approach — a mindset that has helped the firm often recognize market and economic problems well ahead of others. So, what scares Montier right now? The lack of assets offering a “margin of safety”. “I just can’t find any assets that have a particularly high margin of safety,” Montier tells Advisor Perspectives. “There is nothing that reaches out and screams, ‘Hey, I’m really undervalued.’ Therefore,… Read More

Sonders on Why Those High Profit Margins Aren’t So High

In recent years, there’s been a lot of talk about how profit margins have reached unsustainable levels and will revert to their historic mean, which would have negative consequences for both corporate earnings and the stock market. But in a new analysis, Charles Schwab Chief Investment Strategist Liz And Sonders provides some interesting data indicating otherwise, saying that margins may continue to expand — or appear to continue to expand — even though earnings growth… Read More

Hussman: Profit Margins Skewing Valuations

John Hussman, whose funds had strong long-term track records before getting hit hard the past few years, says those who contend stocks are cheap are way off base. “I can’t emphasize enough how badly standard P/E metrics are being distorted by record (but reliably cyclical) profit margins, which remain about 50-70% above historical norms,” Hussman writes in his latest market commentary. Hussman says valuations are actually more elevated than they were before the 2008 market… Read More

Grantham Gloomy, But Not Running From Equities

GMO’s Jeremy Grantham sounds quite gloomy in his latest quarterly letter, though he advises a “near normal” allocation to equities and says high-quality U.S. stocks are “relatively cheap”. Grantham says that both debt overhangs and structural problems — such as income inequality, an aging population, deficiencies in infrastructure and education, and the government’s inability to deal with long-term issues — make him continue to believe that his forecast of “seven lean years” (which he made… Read More

Grantham, Doll Offer Different Takes On Margins

Are historically high profit margins for U.S. firms sustainable, or will they come bouncing back to the mean — and throw a wrench into the stock market in the process? Blackrock’s Bob Doll and GMO’s Jeremy Grantham have very different takes, according to Bloomberg. Doll says a weak job market and labor-saving technologies have helped push margins to their current record high levels. And, he doesn’t see either of those trends abating. Sluggish job growth… Read More