By Philip van Doorn
Even though it is a repeat pattern, the daily grind of a stock market correction can be surprising to investors following a bull market.
This Wall Street Journal headline sums up the action so far in 2022, as investors flee some of the more-speculative stocks: With rate increases looming, investors dump shares of money-losing companies.
Analysts at the Journal concluded that “shares of unprofitable companies in the Nasdaq Composite Index have skidded while their profitable counterparts have traded nearly flat.”
Below is a screen of technology companies in the S&P 500 Index /zigman2/quotes/210599714/realtime SPX +0.95% showing which ones have had the highest average operating margins over the past five years. Such consistent profit-makers might be considered to be safer plays when investors fear rising interest rates.
During the earlier phases of the coronavirus pandemic, federal stimulus and other efforts to help businesses stay afloat, and concurrent moved by the Federal Reserve to lower interest rates and increase the money supply, led to a tremendous move of cash from the debt markets into U.S. stocks.
And all that new money fed a frenzy of initial public offerings, including those circumventing the usual IPO process with quick offerings through special purpose acquisition companies, or SPACs.
Those stocks are included in the Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP +1.51% , which as of 10:10 a.m. ET on Jan. 25 was down 2.9%, for a decline of 17% from its intraday high on Nov. 22. The S&P 500 Index was down 2.6% for the session, for a decline of 11% from its Jan. 4 high, and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.60% was down 2.1% for the day and down 9% from its high that was set on Jan. 5.
Screen for big-tech profits
The Nasdaq is heavily loaded with technology stocks, and many of those companies trade high to earnings because they are at early stages. Many others aren’t yet profitable.
So the following screen begins with the 76 companies in the S&P 500 information technology sector and then adds several tech players in the communication services sector, such as Netflix Inc. /zigman2/quotes/202353025/composite NFLX +4.15% , Meta Platforms Inc. /zigman2/quotes/205064656/composite FB +1.41% , Alphabet Inc. /zigman2/quotes/202490156/composite GOOGL -0.16% and Activision Blizzard Inc. /zigman2/quotes/200717283/composite ATVI +0.88% , which has agreed to be acquired by Microsoft Corp. for $69 billion in cash, in a deal that is undergoing antitrust scrutiny .
From the consumer discretionary sector, Tesla Inc. /zigman2/quotes/203558040/composite TSLA +4.88% and Amazon.com Inc. /zigman2/quotes/210331248/composite AMZN +2.57% were also added to the list, bringing the initial screen up to 85 companies.
We looked back at the companies’ operating margins for the past 20 reported quarters, using data provided by FactSet. A company’s operating margin is its profit per dollar of revenue after paying for the cost of production, including labor and materials, but before interest, taxes and some one-time items that can distort earnings results.
Here are the 20 companies from our initial screen of 85 tech companies in the S&P 500 that have had the highest average operating margins over the past 20 years. The list also includes the minimum and maximum margins during that five-year period:
|Company||Ticker||Average operating margin – 20 quarters||Maximum operating margin||Minimum operating margin|
|Visa Inc. Class A||/zigman2/quotes/203660239/composite V||68.99%||73.10%||65.59%|
|VeriSign Inc.||/zigman2/quotes/205260150/composite VRSN||67.57%||70.38%||63.84%|
|Netflix Inc.||/zigman2/quotes/202353025/composite NFLX||60.83%||65.82%||54.97%|
|Mastercard Inc. Class A||/zigman2/quotes/207581792/composite MA||58.35%||62.70%||51.85%|
|Fleetcor Technologies Inc.||/zigman2/quotes/205312429/composite FLT||54.08%||58.01%||39.98%|
|Micron Technology Inc.||/zigman2/quotes/205710729/composite MU||51.44%||66.99%||35.21%|
|Meta Platforms Inc. Class A||/zigman2/quotes/205064656/composite FB||50.69%||63.25%||41.03%|
|Texas Instruments Inc.||/zigman2/quotes/202237907/composite TXN||48.50%||56.11%||43.68%|
|Broadcom Inc.||/zigman2/quotes/200646538/composite AVGO||46.47%||55.73%||40.40%|
|Intel Corp.||/zigman2/quotes/203649727/composite INTC||44.49%||51.69%||38.29%|
|Microsoft Corp.||/zigman2/quotes/207732364/composite MSFT||44.24%||51.75%||38.59%|
|Oracle Corp.||/zigman2/quotes/202180826/composite ORCL||43.74%||49.02%||39.33%|
|Paychex Inc.||/zigman2/quotes/202030365/composite PAYX||41.89%||46.81%||36.33%|
|Analog Devices Inc.||/zigman2/quotes/201631938/composite ADI||41.13%||46.31%||27.66%|
|Skyworks Solutions Inc.||/zigman2/quotes/201417573/composite SWKS||40.15%||43.52%||33.02%|
|Jack Henry & Associates Inc.||/zigman2/quotes/201857446/composite JKHY||39.47%||43.77%||34.73%|
|Activision Blizzard Inc.||/zigman2/quotes/200717283/composite ATVI||38.95%||47.78%||26.82%|
|KLA Corp.||/zigman2/quotes/209248041/composite KLAC||38.81%||43.36%||31.72%|
|Fidelity National Information Services Inc.||/zigman2/quotes/207166559/composite FIS||38.78%||45.21%||29.86%|
|Microchip Technology Inc.||MCHP||38.10%||42.67%||31.88%|
A screen on one data element can only be a starting point for further research. You can click the tickers for more about each company. Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.