While markets are pretty efficient at prepricing, or “discounting,” all known information so you can’t profit from it, they sometimes miss the elephant in the room: huge truths that for whatever reason are ignored or forgotten.
Exhibit A: any stock’s gross operating profit margin (sales minus direct cost of goods sold). Back in the ’60s and ’70s data were scarce, and while analysts knew that companies with fat gross margins lagged those with thin gross margins early in bull markets—and overachieved in the later phases—they couldn’t do much about it. A simple rule—which I discussed at length in my first book, in 1984.
But now that the information is widely available I find that, paradoxically, no one looks for it anymore. Hence I see power. It’s mostly worked in recent decades and in this early bull cycle as thin gross-margin stocks lead.
Regular readers know I think 1) we’re about halfway through this bull’s duration and 2) big stocks will lead. But also, fat gross margins should lead from here. By that I mean above 50% and higher than the industry’s average. One caveat: It didn’t work last time—I think because that bull was unusually, and prematurely, truncated. But that boosts the odds this bull market ends more normally. In this case gross and fat mean beautiful.
