Margin of Safety
By Massimo Santicchia
Companies with high gross margins tend to have defensive qualities and are more resilient in a recession or a slower-growth period. Looking at a company's gross margins is an appropriate stragegy these days, as corporate profits are eroding and growth is still weak and uncertain.
Gross margins will reveal, as a percentage, how much of each dollar of a company's sales is left over after subtracting the costs of making the product. (To find gross margins, divide gross profits -- sales minus costs of goods sold -- for a period by the revenues for the same period).
A second filter to ensure that you're not overpaying for these high-quality companies: screening for a low price-to-sales ratio (a company's stock price divided by sales).
This S&P stock screen, then, has two steps. First, the screen picks the top 50 stocks in the S&P 500 Index by trailing gross margin. Those stocks that make the cut are screened again for the 20 lowest price-to-sales ratios.
Here are the stocks that emerged:
Massimo Santicchia is a portfolio analyst at Standard & Poor's