Screening for Improving Margins

Margin expansion is one of the most powerful drivers of stock price appreciation. When a company grows its revenue while simultaneously improving profitability, the effect on earnings is multiplicative — you get growth from both the top line and the bottom line. This operating leverage is what separates stocks that merely keep pace with the market from those that dramatically outperform it.

Screening for companies with improving margins helps you identify businesses that are gaining pricing power, achieving scale economies, or successfully cutting costs. These margin trends often precede major earnings surprises and stock price moves, making them valuable leading indicators for investors.

What to Look For

• Operating margin above 20% — this threshold signals that the company has meaningful pricing power and operational efficiency. Businesses with high margins have a larger buffer to absorb cost increases.
• Margin expansion trend — look for margins that are improving over time, not just high at a single point. Rising margins suggest the business is getting better, not just benefiting from a one-time event.
• Revenue growth alongside margin expansion — margin improvement through cost-cutting alone has limits. The best opportunities combine growing revenue with expanding margins.
• Gross margin stability — while operating margins can improve through SGA reduction, declining gross margins may signal competitive pressure on pricing.

How to Set Up the Screen

Set the operating margin filter to Over 20% to focus on companies with strong profitability. This filter alone narrows the universe significantly, as most public companies operate with thinner margins. You can further refine by adding revenue growth filters to ensure margin expansion is occurring alongside top-line growth, which is the most bullish combination for future earnings.

Interpreting Your Results

High-margin companies cluster in sectors like technology, healthcare, and consumer brands. This is expected — asset-light business models and intellectual property naturally support higher margins. When evaluating results, compare margins within sectors rather than across them. A 20% operating margin is excellent for a retailer but unremarkable for a software company. Also investigate the source of margin improvement: is it driven by revenue scale, product mix shifts, cost rationalization, or price increases? Sustainable margin expansion typically comes from scale and mix, while cost cuts and price hikes have natural limits.

Common Pitfalls

• Mistaking cyclical peaks for structural improvement: Some industries see margins expand during upcycles and contract during downturns. Make sure margin improvement is structural, not just cyclical.
• Ignoring reinvestment needs: Some companies boost margins by underinvesting in R&D, marketing, or capital expenditures. This can flatter near-term margins while undermining long-term competitiveness.
• One-time items: Margin spikes can result from one-time events like asset sales, legal settlements, or accounting changes. Look at adjusted operating margins and verify the trend is genuine.

Screen Now

Find companies with strong and improving profitability. Launch the high-margin screen to see which stocks are leading on operating efficiency.