Peter Lynch once said “I always thought if you looked at ten companies, you’d find one that’s interesting, if you’d look at 20, you’d find two, or if you look at hundred you’ll find ten. The person that turns over the most rocks wins the game.”
Synergy Financial Management
Q1 Earnings Season
Shifting into High Gear – Profit Margins in Focus
As the rate at which companies begin reporting Q1 results this week increases, it hard not to notice that the S&P 500 market weighted composite is approaching cyclically high profit margins. Rising costs are forcing investors to focus on the profit margins that companies can squeeze out of their operations. Companies like Nike (NKE) have recently reported higher sales but lower earnings from a year ago as higher costs of freight, labor, and logistics weight on margins.
While investors are cheering the broader market profit margins at record highs, we are beginning to see cracks forming across several sectors that could be cause for concern that broader market margins will begin rolling over commensurate with a slowdown in the broader economy.
In summary, we believe that owning a small number of high-quality companies like in our Focused Strategies, will outperform the general broad market where you get both the less profitable companies along with the profit companies. Stock selection may prevail over indexing moving forward.
Rising input costs have outpaced the average consumer staples company’s ability to pass cost increases along to their leading to a decline in gross margins. EBIT and net margins are also beginning to rollover due to cost pressures.
Utility margins have been under pressure for the better part of a year and the decline has recently begun to accelerate. Rising input costs along with rising selling, general and administrative costs have combined to outpace incremental revenue gains from rate increases, leading to a rollover in net profit margin.
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