In his latest article on Linkedin titled – When Excess Fat Is GOPM Great for You, Ken Fisher discussed why Gross Operating Profit Margins (GOPM) are so much more important than net profit margins. Here’s an excerpt from the article:
Earnings, earnings, earnings! Often, that is all pundits dissect. How much profit did a firm report? Did it meet Wall Street’s expectations? Will its earnings soar or sag next year? Fine questions! But investors stuck in this myopia miss a better gauge of future growth: gross operating profit margins (GOPMs). That they aren’t considered lends them power, particularly in later-stage bull markets—like now. Here is why these “fat” margins offer you an edge over others—and how to deploy them today.
Sure, net earnings-per-share matter—stocks are ownership stakes in firms’ future profits, after all. But past profits lack predictive power. Why? Accounting gimmickry lets managements twist short-term results. I don’t mean Enron-, Theranos- or Wirecard-type chicanery. Firms perfectly legally decide when to readjust depreciation, take write-downs, repurchase shares or upgrade facilities. Legal or regulatory expenses can whack net income one quarter, yet never recur. All this distorts reported net earnings, obscuring what matters most: a firm’s core business strength and long-term growth capability.
As important: The huge attention net earnings receive means new forecasts or results are pre-priced near-instantaneously. Just consider the vast coverage everyone from CNBC to The Wall Street Journal to MarketWatch—and all points in between—give earnings “season.” When the actual news releases come, markets will have largely anticipated the results. The stock may zig or zag briefly as reality and expectations line up. But that happens too fast for almost anyone to act—and usually has little lasting effect.
What to do when ubiquitous, pre-priced data leaves no one an investment edge? Look past the data to analyze the data devotees themselves. Seek what their mathematical myopia makes them miss—or dismiss. Today, most analysts and pundits see metrics like GOPM as relics of a pre-digital era, when frenetic traders barked orders across bustling, paper-littered exchange floors and computers had less power than today’s smartwatches.
Data-driven managers claim GOPMs are too rudimentary to compete with their complex algorithms. Ironically, when I started 50 years ago gross margins were widely taught because they are so simple! No need for supercomputers. Just subtract the cost of goods sold on the income statement from sales—easy to find even then. Divide the result by sales. Done! Nowadays, with so many pundits dismissing them, gross margins aren’t only easy to calculate—they have real power.
You can read the entire article here:
Ken Fisher: When Excess Fat Is GOPM Great for You
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