Unlike in your diet, more fat is great in stocks

EARNINGS, earnings, earnings. Often, that is all pundits regard. How much profit did a firm report? Did it meet expectations on Shenton Way? Will companies' earnings soar or sag next year? Fine questions. But investors mired in this myopia miss a better gauge of a company's future: gross operating profit margins. That they aren't valued makes them powerful - particularly in late-stage bull markets such as the one we are in now. Here is why fat gross margins offer you an investing edge, and how to deploy them in Singapore now.

Yes, earnings matter. Stocks are ownership in a company's future profits, after all. But past profits foretell little about what follows. Why? Accounting gimmickry lets companies tweak short-term results. I don't mean scandals such as those that dogged Hyflux or Noble Group and led the Singapore Exchange to expand its oversight of auditor appointments starting 2022. Companies perfectly legally decide how and when to readjust depreciation, take write-downs and much more. They may pick one quarter over another to repurchase shares or divest facilities. One-time legal or regulatory expenses can whack net income one quarter, yet never recur.

All this distorts reported earnings, obscuring what matters most: the company's future fundamental core growth abilities. Further, the fixation with net earnings means new forecasts or results are pre-priced near-instantaneously. Once average investors get the news, the stock has already wiggled accordingly.