5 companies on expected margin expansion streaks could see their stocks really run
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Six quarters of shrinking margins among S & P 500 companies have ended — and according to a Barclay’s analysis, that flip has historically led to a higher market in the months ahead. “Post-margin inflection market returns” averaged 15% to 17%” over the next six to 12 months, with consistent outperformance in tech, consumer, health care, and materials, the analysts said in a note to clients this week. Barclay’s looked at “10 comparable episodes” over the past 45 years that lasted on average for six quarters after margin pressures first hit. The analysts said this arch happened most recently from the first quarter of 2022 to the second quarter of 2023. However, Barclay’s did temper its optimism, saying most S & P 500 companies are not doing as well as the market-cap weighted index may indicate. In the past, we’ve done a performance comparison with the equal-weighted S & P 500 and arrived at a similar conclusion. That said, we found the screen intriguing and decided to see how margin performance is playing out for each company in our portfolio. Importantly, we aren’t simply looking for margin expansion or general improvement but rather for operating margins at companies that expanded for the first time in the most recently reported quarter. As a second layer, Wall Street must expect the switch from negative to positive operating margins to continue into the foreseeable future. In this case, that’s at least six more quarters. The historical data and the forward estimates were sourced from FactSet. Five Club stocks met the criteria that were inspired by the Barclay’s report. These companies delivered operating margin expansion in the most recently reported quarter following a streak of contraction. One of these names, Costco (COST), will be put to the test next week when it reports earnings. COST YTD mountain Costco YTD Following five straight quarters of operating margin compression, Costco reported back in September expansion in its final quarter of 2023. The expectation is for that trend to continue through February 2025. With the wholesale retailer set to report fiscal 2024 first-quarter earnings next week, it will be the first in our portfolio to be put to the operating margin test. Was it a fluke or the start of a new trend for profitability? We love Costco. But with shares near all-time highs into next week’s report, we’re maintaining our 2 rating for now. DIS YTD mountain Disney YTD The same goes for Disney (DIS), which reported last month an operating margin expansion in its fiscal 2023 fourth quarter. It followed four consecutive quarters of contraction. With CEO Bob Iger continuing to find new savings, we think investors are going to appreciate the improved operating margin to come, especially given how depressed the stock price has been. Wall Street thinks operating margin improvements can extend at least out to March 2025. We have a 1 rating on Disney stock. This one has clearly been a disappointment, but the price is right to buy shares here, especially with activist investor Nelson Peltz back in the picture with intentions to fight for board representation and push for increased financial discipline. ORCL YTD mountain Oracle YTD Enterprise software giant Oracle (ORCL) is another name that just flipped into positive operating margin territory. Following six straight quarters of margin contraction (and contraction in eight of the last nine quarters), we got expansion with the September release of fiscal 2024 first quarter results. Based on forward estimates. That’s just the beginning of a streak Wall Street expects to last until at least the February quarter of 2025. We have a 1 rating on shares — and with artificial intelligence still in the early innings and Oracle making a concerted effort to align itself with AI powerhouse and fellow Club holding Nvidia (NVDA), we see a strong year ahead. Shares were trading above the five-year average multiple based on forward earnings estimates. But, they’re valued right in line with their historical average when adjusting for the company’s growth outlook, which can be attributed in large part to that Nvidia alignment. STZ YTD mountain Constellation Brands YTD Mexican beer king Constellation Brands (STZ) reported in October an operating margin expansion for its fiscal 2024 second quarter following three consecutive periods of contraction (and contraction four out of the last five quarters). However, Wall Street thinks there’s more to come with year-over-year operating margin expansion expected through the quarter ending in February 2025. We maintain a 1 rating on shares. With the stock trading two turns below its historic forward multiple average, shares are set up nicely in fiscal 2024 as management continues its work to optimize its portfolio. SWK YTD mountain Stanley Black & Decker YTD Last on the list is turnaround story Stanley Black & Decker (SWK), which in October reported its first operating margin expansion in over two years — going back to the June quarter of 2021. Here’s another one Wall Street sees a clear runway on, modeling out further operating margin expansion through March 2025. Though shares of this toolmaker were currently trading a bit above their five-year historic forward multiple average, they sport an annual dividend yield of 3.4%. That’s higher than the historical average. We wouldn’t be surprised to see earnings come in stronger than expected in January as the management’s turnaround efforts take hold. We therefore maintain our 1 rating on the stock. To be sure, many of our names are set to show improved operating margins in the year ahead. However, some simply didn’t make the list either because the improved leverage started more than one quarter ago or because there is expected to be at least a quarter of year-over-year contraction at some point in the next six quarters. Either factor would have kept them off our list. However, honorable mentions, if you will, go to some of our portfolio companies currently in deleveraging phases and expected to improve after the next one to two quarterly reports. They include DuPont (DD), Danaher (DHR), Estee Lauder (EL) and Foot Locker (FL). We will watch the operating margin performance of these companies closely as all of their stocks are well off prior highs but could be putting in a buyable bottom should profitability be on the verge of an inflection. (Jim Cramer’s Charitable Trust is long COST, DIS, ORCL, STZ, SWK, DD, DHR, EL, FL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Customers wait in line to check out purchases at Costco store on June 28, 2023 in Teterboro, New Jersey. Costco is cracking down on membership card sharing at its stores.
Kena Betancur | Corbis News | Getty Images
Six quarters of shrinking margins among S&P 500 companies have ended — and according to a Barclay’s analysis, that flip has historically led to a higher market in the months ahead.
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