Markets & Finance

Margin of Safety


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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