9%.
That doesn’t seem like a lot, does it?
Well, it’s actually a pretty significant number for today’s edition of What My System Says Today.
I’ll get to that in a second.
First, I want to talk about operating margin.
Operating margin measures a company’s efficiency by showing how much profit is generated from core operations for every dollar of revenue after covering variable costs like wages and rent.
The higher the operating margin percentage, the better a company’s management is at controlling costs and profitability.
Operating margin (also known as return on sales) is calculated by dividing operating earnings (earnings before interest and taxes, or EBIT) by total revenue.
Here’s where the 9% comes in…
Between 2010 and 2019, the S&P 500’s total operating margin averaged around 13%.
Non-tech-related companies had an operating margin of around 9% during that time, while tech-related companies averaged the remaining 4%.
However, over the last three years, the operating margin of tech-related companies has steadily increased.
Last year, tech-related companies had an operating margin of around 9%, while non-tech-related companies were still around the 9% average from 2010 to 2019.
This means that the bulk of the S&P 500’s operating margin increase has come from tech companies.
Tech companies have seen operating margins rise due to the scalability of software, aggressive cost-cutting (including layoffs), and the integration of artificial intelligence to boost efficiency.
Now, I’ve cast a wide net using Adam’s Green Zone Power Ratings system to find those tech companies with growing operating margins…
Seeking Tech Stocks With High Margins
It’s not uncommon for tech companies to have higher operating margins.
Low variable software costs and high scalability keep costs under control.
There are exceptions.
Tech hardware companies and early-stage startups may have lower margins because of higher research and development costs.
So, I built a screener to find the right tech stocks with higher (and growing) operating margins. Here was my criteria:
- Must rate at least an 80 on Adam’s Green Zone Power Ratings system.
- Must have an operating margin in the top 20% of its industry.
- Current quarterly operating margin is higher than the prior year’s quarter.
- Current annual operating margin is higher than the previous year.
Here are the nine stocks that met all of that criteria:
Not every company on this list is on the S&P 500. That’s because I wanted to catch a wide net to find just the right stocks.
The top stock (by current operating margin) is InterDigital Inc. (IDCC). The company has among the highest numbers of patents for 5G technology and video codec software.
InterDigital has a current operating margin of 62%, compared to its software industry average of -15.7%. It’s grown that operating margin by 24.1% year over year.
Another that stands out on the list is Rand Worldwide Inc. (RWWI). This software distributor has a current operating margin of 35.7%, compared to its software distribution peer average of 14%.
However, Rand Worldwide has grown that operating margin by 105.4% year over year.
These nine companies are turning in strong operational profits, beating their industry average, and are “Strong Bullish” on Adam’s Green Zone Power Ratings system
Toss in the fact that each of them has grown their operating margin over the last year, and you have a compelling case for adding any of these to your portfolio.
That’s all from me today.
Until next time…
Safe trading,
Matt Clark, CMSA®
Chief Research Analyst, Money & Markets