5 attractive stocks with unusually high profit margins

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It was a great year for stocks with big profit margins. Five fat-margin stocks I recommended on September 7, 2020 returned 78.6% through September 3 this year.

Gamco Investors

GBL
, Mario Gabelli’s investment company, led the way with a return of 136%. A year ago, I wrote: “I consider Mario Gabelli almost egocentric… but so are many of the great practitioners of any art. I recommended Gamco stocks as “very cheap”.

The next best was Applied materials

AMAT
with a return of 125%, followed by black rock

BLACK
at 69% and Cisco Systems

CSCO
at 50%. The latecomer was electronic arts

EA
, up 13%. By comparison, the Standard & Poor’s 500 index generated a return of 34%, including dividends.

Today, I’m going to offer you some high-margin stocks recommendations again. Will they do as well as last year? Almost certainly not. Feedback like this doesn’t happen often. I would be happy if this year’s picks beat the S&P 500 by a few points.

I wrote 11 columns on stocks with big profit margins, and the average return was 21.1%, versus 17.3% for the index. Eight of the 11 sets of recommendations were profitable, but only three beat the S&P 500.

Keep in mind that the results in my column are hypothetical: they don’t reflect actual transactions, transaction costs, or taxes. These results should not be confused with the performance of the portfolios I manage for clients. Also, past performance does not predict future results.

Now let’s take another swing. Here are five stocks I like that have unusually high profit margins (profits as a percentage of sales).

Regenerate

REGN
, a biotech company based in Tarrytown, New York, manufactures the antibody cocktail used to treat former President Trump for Covid-19. It also makes Eylea, a drug used to treat age-related macular degeneration, one of the leading causes of blindness in older people. Additionally, Regeneron has several other drugs approved, and more in the pipeline.

The company’s after-tax profit margin for the past four quarters is 50% and has been above 20% since 2017. The stock is selling for 12 times recent earnings and 15 times analyst earnings forecasts for the next four quarters.

T. Rowe Prize Group

TRUE
, a mutual fund company headquartered in Baltimore, Maryland, has an after-tax margin of 42%. This margin has been 23% or better in each of the past 15 years. Over the past decade, it has grown its revenue at an annual rate of 11% and its profits at 14%.

T. Rowe Price offers index funds, but is best known for its actively managed funds. It is especially strong in 401k business plans. I am a passionate proponent of active management as opposed to index tracking.

A medical testing company based in San Diego, Calif., Quidel (QDEL) has posted a net margin of 49% lately. It is selling for just 7 times its earnings as it derives much of its revenue from Covid-19 testing, and investors are anticipating the end of the Covid pandemic.

I wish it were so, but I’m afraid this nightmare will persist for a few more months. Even after Covid has tamed, I think we will live in a world where medical testing will be more frequent than before.

A debt-free choice is Gentex

GNTX
, which manufactures auto-dimming mirrors for cars. It had a 24% net margin for the past four quarters and has exceeded 20% since 2014.

A risk here is that car sales will slow, due to shortages of used semiconductors. But over the past ten years, Gentex has grown its revenue by almost 10% a year and its profits by more than 13%. It gives me some confidence.

For my final selection, I choose PotlatchDeltic

PCH
, a real estate investment trust based in Spokane, Washington. It owns and manages forest lands in Minnesota and four southern states.

Wood has been in high demand lately as housing has boomed. For PotlatchDeltic, last year was a great year compared to normal. But normal is not so bad: the company has made profits in 26 of the last 30 years (the loss years were 2000-2003). The recent net margin was 34%. The stock is selling for a modest 7 times earnings.

Disclosure: I own shares of T. Rowe Price personally and for most of my clients. I personally own Cisco stocks and Cisco call options in a hedge fund that I manage. One or more of my clients own Applied Materials, Blackrock and Electronic Arts.

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