There are tens if not hundreds of different ways to look at a company's profits, so it's best to keep in mind the options. For companies that sell a lot of inventory, such as a medical device company or a company in the retail industry, one good measure is gross profit margin -- the percentage of profits taken after deducting "cost of goods sold."
COGS is the cost attributed to inventory sold and represents the largest expense for many companies centered on selling physical products. Although gross margins vary widely across industries, one universally positive sign is when companies see consistent increases in their gross margin.
This generally indicates more aggressive pricing (and higher demand for products) or simply a change in accounting methods. However consistent increases support the idea that the source is more aggressive pricing and higher demand.
Business section: Investing ideas
For ideas on how to use this concept, we ran a screen on companies seeing consistent increases in their gross margins over the last four years.
We screened these stocks for those seeing significant short covering month-over-month (a bullish indication from short sellers that they believe these names will soon outperform).
Do you agree with short-sellers that these stocks will outperform?
List sorted by decrease in shares shorted as a percent of share float. (Click here to access free, interactive tools to analyze these ideas.)
1. GAIN Capital Holdings
2. The Jones Group
3. Isoftstone Holdings Limited: Provides various information technology (IT) services and solutions in the Greater China and internationally. Market cap of $531.06M. Gross profit margins increased from 33% to 33.2% during the first time interval (12 months ending 2008-12-31 vs. 12 months ending 2007-12-31). For the second time interval, gross margins increased from 33.2% to 34.23% (12 months ending 2009-12-31 vs. 12 months ending 2008-12-31). And for the final time interval, gross margins increased from 34.23% to 36.19% (12 months ending 2010-12-31 vs. 12 months ending 2009-12-31). Shares shorted have decreased from 3.33M to 2.34M month-over-month, a change representing 3.34% of the company's 29.61M share float.
4. Dril-Quip: Designs, manufactures, fabricates, inspects, assembles, tests, and markets engineered offshore drilling and production equipment for use in deepwater, harsh environment, and severe service applications worldwide. Market cap of $2.71B. Gross profit margins increased from 42.43% to 42.46% during the first time interval (12 months ending 2008-12-31 vs. 12 months ending 2007-12-31). For the second time interval, gross margins increased from 42.46% to 42.56% (12 months ending 2009-12-31 vs. 12 months ending 2008-12-31). And for the final time interval, gross margins increased from 42.56% to 43.03% (12 months ending 2010-12-31 vs. 12 months ending 2009-12-31). Shares shorted have decreased from 3.69M to 2.61M month-over-month, a change representing 3.13% of the company's 34.49M share float.
5. Cninsure
6. Pep Boys-Manny, Moe & Jack
7. Gannett: Operates as a media and marketing solutions company in the United States and internationally. Market cap of $3.29B. Gross profit margins increased from 21.98% to 35.78% during the first time interval (52 weeks ending 2008-12-28 vs. 52 weeks ending 2007-12-30). For the second time interval, gross margins increased from 35.78% to 36.66% (52 weeks ending 2009-12-27 vs. 52 weeks ending 2008-12-28). And for the final time interval, gross margins increased from 36.66% to 40.54% (52 weeks ending 2010-12-26 vs. 52 weeks ending 2009-12-27). Shares shorted have decreased from 26.04M to 21.51M month-over-month, a change representing 1.91% of the company's 236.63M share float.
8. Youku
9. Home Properties: Engages in the ownership, operation, acquisition, development, and rehabilitation of apartment communities in the United States. Market cap of $2.77B. Gross profit margins increased from 57.88% to 58.32% during the first time interval (12 months ending 2008-12-31 vs. 12 months ending 2007-12-31). For the second time interval, gross margins increased from 58.32% to 58.32% (12 months ending 2009-12-31 vs. 12 months ending 2008-12-31). And for the final time interval, gross margins increased from 58.32% to 59.13% (12 months ending 2010-12-31 vs. 12 months ending 2009-12-31). Shares shorted have decreased from 3.76M to 2.88M month-over-month, a change representing 1.85% of the company's 47.44M share float.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Alexander Crawford does not own any of the shares mentioned above. Gross margin data sourced from Google Finance. Short data sourced from Yahoo! Finance.
