Buy stock ‘compounders’ for the long-term, Trivariate Research says
Thursday’s stock market followed this week’s pattern: an early selloff followed by a recovery. Nvidia’s latest results helped the send major indexes to about a 0.25% loss early Thursday before the S & P 500 rallied to end the day above 6,500 for the first time. On Monday, stocks sold off but have spent the next three days moving higher. One strategy for investors looking to ride out any near-term crosscurrents, however, might be to look to steady, long run “compounders” and outperformers, according to Trivariate Research. While U.S. stock indexes are on track for a fourth straight winning month, traders are still grappling with several concerns around the strength of the tech stock rally, the effect of tariffs on consumer spending and inflation and President Donald Trump’s interference with the U.S. central bank and pressure on the Federal Reserve to lower interest rates. “Because of large market volatility, several investors have told us they are going to just buy compounders and wait out the near-term noise,” Adam Parker, Trivariate Research founder and CEO, said in a recent note to clients.” To find strong multi-year stock opportunities, Trivariate looked at four key growth metrics: gross margin growth, revenue growth, net margin growth and prior price momentum. “Of the four signals we studied, buying stocks in the top 10% of consistent previous gross margin expansion resulted in the best subsequent stock performance,” Parker wrote. Parker, the former chief U.S. equity strategist at Morgan Stanley, identified more than three dozen companies that have increased gross margins every quarter for 12 consecutive quarters. Of those, 22 are forecast to continue to boost gross margins in coming quarters, he said. Take a look at some of those stocks below: E-commerce giant Amazon was the largest company on the screen by market capitalization, and qualifies as a steady gross margin grower. Amazon has an annual gross profit margin of 48.85%. Amazon shares are up more than 4% this year through Wednesday, lagging “Magnificent 7” tech peers like Google parent Alphabet , Meta and Nvidia . Amazon in late July released better-than-expected financial results for its second quarter, along with light operating income guidance for the current quarter. Electrical equipment makers Eaton and Amphenol are other stocks that investors can look to for long-term outperformance, according to Trivariate. Eaton has been a data center play, surging 21% in the past six months, nearly twice the return in the S & P 500. Wall Street is sticking by Eaton even after shares sold off on a disappointing third-quarter outlook. Of the 32 analysts who cover Eaton, 21 rate it a strong buy or buy, while 11 peg it at no more than a hold. Eaton’s annual gross margin is about 38%. Coupang , Airbnb and AT & T were other companies tagged as offering reliable, long-term growth in gross margins. Shares of Coupang, the leading e-commerce platform in South Korea, have jumped more than 28% year to date through Wednesday. Josh Brown and Sean Russo of Ritholtz Wealth Management recently spotlighted Coupang as a stock with room to run. Over the past two years, Coupang has widened gross margins by 4.8 percentage points and and EBITDA margins by 1.9 points, they said.
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