According to the Good Companies Screen, a predefined screen within our All-in-One Guru Screener, five stocks that have high operating margin growth and have been profitable over the past 10 years are Masimo Corp. (MASI, Financial), Nathan’s Famous Inc. (NATH, Financial), Edwards Lifesciences Corp. (EW, Financial), Chemed Corp. (CHE, Financial) and The Toro Co. (TTC, Financial).
Dow snaps eight-day winning streak
On Monday, the Dow Jones Industrial Average closed at 27,076.82, down 142.70 points from last Friday’s close of 27,219.52. The Dow closed lower for the first time since Sept. 3 on the heels of increased economic slowdown fears due to crude oil prices increasing over 15% following an attack in Saudi Arabia.
Keep investing in good companies
Despite the market setback, Warren Buffett (Trades, Portfolio)’s favorite market indicator reached 144.3%, suggesting a significantly overvalued stock market. Based on this market level, the expected market return over the next eight years is -2.1% per year assuming a reversion to the mean indicator level of 80%.
GuruFocus’ “Good Companies” investing strategy seeks noncyclical companies that have good business predictability, a 10-year median return on capital of at least 14%, 10-year revenue growth between 8% and 20% and 10-year earnings growth between 10% and 20%. More importantly, such companies have 10 years of profitability over the past decade.
The “Number of Years of Profitability over the past 10 Years” filter allows you to screen for companies that have at least "n" years over the past 10 years.
A backtest of the strategy where one selects the top 10 stocks with the highest operating margin growth rate saw the model portfolio return a cumulative 292.18% during the backtest period from January 2006 to September 2019, outperforming the Standard & Poor’s 500 Index's return of 205.02% over the same period. The operating margin growth rate is a five-year compound annual growth rate computed using loglinear regression.
Masimo
With an operating margin growth rate of 10.80%, Masimo represents the top stock on the “Good Companies” list based on operating margin growth.
The Irvine, California-based company develops superior signal processing algorithms to measure blood oxygen levels through pulse oximetry. GuruFocus ranks Masimo’s financial strength 9.4 out of 10 on several positive indicators, which include robust interest coverage, a strong Altman Z-score of 28.6 and debt ratios that outperform over 97% of global competitors.
Gurus riding Masimo’s strong profitability include Mario Gabelli (Trades, Portfolio) and Chuck Royce (Trades, Portfolio), two of our speakers at the 2019 GuruFocus Value Conference.
Nathan’s Famous
Nathan’s Famous has an operating margin growth rate of 9.60%, the second-highest growth rate among the good companies.
The New York-based fast-food chain operates brands like Arthur Treacher’s Fish and Chips, Kenny Rogers Roasters and Miami Subs. GuruFocus ranks the company’s profitability 9 out of 10 on several positive indicators, which include a strong Piotroski F-score of 8, a 3.5-star business predictability rank and a return on assets that is near a 10-year high of 24.65% and outperforms 96.79% of global competitors.
Edwards Lifesciences
With an operating margin growth rate of 6.50%, Edwards Lifesciences is ranked No. 3 on the good companies list.
The Baxter International Inc. (BAX) spinoff designs, manufactures and markets a range of medical devices and equipment for advanced stages of heart disease. GuruFocus ranks Edwards’ financial strength 8.2 out of 10 and profitability 9 out of 10 on several positive indicators, which include robust interest coverage, a strong Piotroski F-score of 7 and business predictability rank of four stars.
Chemed
With an operating margin growth rate of 5.60%, Chemed ranks No. 4 on the good companies list.
The Cincinnati-based company operates two business segments: Chemed’s VITAS segment provides hospice and palliative care services, while the Roto-Rooter segment provides plumbing and other residential maintenance services. GuruFocus ranks Chemed’s profitability 8 out of 10 on several positive indicators, which include a strong Piotroski F-score of 7 and a return on assets that outperforms 94.47% of global competitors. Additionally, Chemed’s business predictability ranks 4.5 stars on strong and consistent revenue growth over the past 10 years.
Toro
With an operating margin growth rate of 5.10%, Toro ranks No. 5 on the good companies list.
The Bloomington, Minnesota-based company manufactures a wide variety of turf maintenance and landscaping equipment. GuruFocus ranks Toro’s profitability 7 out of 10: Even though the company’s three-year revenue growth rate underperforms 71.24% of global competitors, its returns are outperforming over 92% of global industrial products companies.
Disclosure: No positions.
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