Get Yer Fat Profit Margins Here

When I was a beginning investor, I learned how to crunch a few numbers and off I ran, looking for companies with, say, low price-to-earnings (P/E) ratios, or high net profit margins. Alas, that didn't serve me particularly well. Looking only at one or two variables means you'll be missing a lot of the big picture. Think of that old tale of the blind men examining an elephant. One who only felt the leg might think it was a tree. One who only felt the tail might think it was a brush.

Still, it remains tantalizing to find companies with certain great metrics, such as fat net profit margins. I found these margin masters through a recent Yahoo! Finance screening:

Perhaps that net margin metric isn't so irrelevant. The list above features some darn impressive companies with great prospects and superb track records.

It's not easy being profitable
Although I wish this were enough to find successful stocks, it's not. Consider Coca-Cola, for example. It has much to recommend it, but it doesn't lack for drawbacks, either. In our CAPS stock-rating system, a whopping 143 of our best-performing "All-Star" participants are bullish on it. But a significant 13 are bearish. Here are some of the negative comments our All-Star players have made about Coca-Cola:

• "They simply don't have the growth prospects to justify their valuation."
• "There's only so far you can go in already saturated, highly competitive markets."
• "[The] shift from carbonated drinks will hurt Coke's growth"
• "Management trouble, mixed-up marketing strategy, unhealthy focus in a world that needs to drink water."
• "Innovation is absent and growth will continue to be mediocre unless they find a breakout product that also stirs interest in existing products."
• "Coca-Cola is a great product, but it's in the mature stage of its life cycle with little opportunity for growth. The run-up in the stock price over the past year has made it too expensive to offer any upside potential."

Time to give up?
Does this mean that screening for fat profit margins is a useless exercise? Well, yes and no. On its own, it can give you a list of companies worth exploring further, since there are bound to be some gems among the also-rans. However, doing so can eat up a lot of time. Instead, you might screen for a broader array of variables, which should give you a much smaller field to work with.

I tried that myself, screening for profit margins of 20% or more, P/E ratios of less than 20 (since a low P/E can suggest an undervalued stock), an annual earnings growth rate of more than 10% over the past five years, and expected growth of more than 10% annually over the next five years. I ended up with several dozen stocks, only one of which appeared my list above: Goldman Sachs.

Goldman Sachs sports a P/E ratio around 10, net profit margins around 25%, and a five-year growth rate for net income of 15%. That's a compelling combination, and the stock may be worth your further attention.

Foolish conclusion
Great companies at bargain prices are something every investor should want in their portfolio. Just remember that while screening can be fun and profitable, you should follow it up with further research to complete the picture. Our Motley Fool Inside Value team seeks stocks that blend high performance with low prices, and their picks are beating the market 20% to 14% on average. You can see all our bargain-priced selections with a free 30-day trial.

Longtime Fool contributor Selena Maranjian owns Microsoft and Coca-Cola. Microsoft, Coke, and First Data are Inside Value recommendations. The Motley Fool is Fools writing for Fools.