Margin of Safety

Companies with high gross margins are more resilient in an economic downturn. Here are 20 top examples

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:

Company Gross Margin Price/Sales
Apache Corp. 86.0 3.1
Autodesk Inc. 86.6 1.9
BMC Software Inc. 90.9 3.4
Burlington Resources 68.9 2.8
CIT Group Inc. 79.7 1.2
Devon Energy Corp. 79.3 2.7
EOG Resources Inc. 85.1 3.3
Federated Home Loan Mortgage 95.7 1.5
Gillette Co. 69.3 3.5
Harcourt General 70.7 1.7
Lehman Brothers 81.6 0.6
Mellon Financial 74.1 3.2
Nextel Communications 75.4 2.0
Novell Inc. 78.3 1.5
Parametric Technology 76.2 2.6
St. Jude Medical 73.1 3.8
Synovus Financial 69.3 3.9
Tupperware Corp. 71.4 1.3
USA Education Inc. 86.6 2.9
UST Inc. 80.4 3.2

Massimo Santicchia is a portfolio analyst at Standard & Poor's

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