What are we looking for?
U.S. companies that boast solid profit margins compared with other firms in their industry. These businesses would seem to possess some competitive edge that allows them to extract better returns than their peers from an equal amount of assets. Their shares might therefore be attractive investments.
How we did it
Our friend Craig McGee, senior consultant at CPMS Morningstar Canada, did us the favour of scouring the CPMS U.S. database for stocks in the S&P 500 that had gross-profit-to-assets (GPA) ratios greater than their rivals in the same industry.
He further refined his search by requiring each stock to have a positive change in gross profit per share over the past year, and also a positive change in consensus analyst earnings estimates over the past 90 days.
To rank these stocks, Mr. McGee gave equal weighting to industry-relative GPA, gross profit change and consensus estimate revisions. To ensure adequate diversification, he allowed no more than three stocks per sector. The top 25 stocks are shown in the accompanying table.
More about Morningstar
Morningstar Inc. provides independent investment research in North America, Europe, Australia and Asia. Its investment research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market.
What we found
Research by Robert Novy-Marx, an associate professor of finance at the University of Rochester, indicates that GPA may be a better guide to future stock market winners than more common measures of value based on earnings or cash flow. Be aware, though, that past performance is not a good guide to future results. Do your own research before buying any of the shares listed here.