The Four Stocks That Make Up the 'Magnificent Seven' Over the Earnings Season

The interpretation of a company beating analysts' expectations in its quarterly results may not hold significant weight, as the bar set by analysts could be intentionally low, influenced by the company's own projections. This dynamic often leads to a high "beat rate" of 70% or more each earnings season. Moreover, a reported "beat" might actually represent a net loss that is simply lower than anticipated.

‍

To gauge an impressive set of quarterly results, a combination of enhanced profit margins and increased sales proves to be a more substantial criterion. This involves examining gross profit margins and operating margins in tandem. An analysis of the top 20 companies in the S&P 500, showcasing the most substantial increases in sales while concurrently expanding these critical profit margins, reveals that four of these entities, collectively referred to as the "Magnificent Seven," pass the screening process.

‍

Deutsche Bank analysts highlight that the combined market value of this elite group, comprising Microsoft Corp., Apple Inc., Nvidia Corp., Amazon.com Inc., Meta Platforms Inc., Alphabet Inc., and Tesla Inc., surpasses the combined stock markets of Japan, France, and the United Kingdom.

‍

As a caveat, around 20% of S&P 500 companies operate on fiscal years that do not align with the calendar year, causing a lack of a neat beginning or ending to the quarterly earnings season. Up until now, 338 companies in the benchmark index have reported results for fiscal quarters ending November 15 or later.

‍

Traditional metrics like net income or earnings per share may be misleading due to one-time events affecting the bottom line, such as write-downs of goodwill, noncash accounting adjustments, or extraordinary legal expenses. Therefore, the focus is shifted towards companies that exhibit the most significant year-over-year increases in quarterly sales while concurrently improving gross profit margins and operating margins.

‍

Gross margin, a measure of a company's pricing power, is calculated by dividing net sales by the cost of goods or services sold. An expanding gross margin coupled with increased sales is considered a positive sign. Net operating margin delves further by subtracting additional overhead and non-production-related expenses from earnings before interest and taxes, providing a more comprehensive measure of profitability.

‍

Among the 263 companies analyzed, spanning various sectors excluding financials, 20 stand out for achieving the highest growth in quarterly sales while concurrently expanding both gross and operating margins.

‍

The top three companies on this list, alongside Royal Caribbean Group in sixth place, all operate in the travel and leisure industries, displaying recovery from the COVID-19 pandemic. Notably, four out of the Magnificent Seven—Meta, Microsoft, Alphabet, and Amazon—make this distinguished list. Explanations are provided for why the remaining three, Nvidia, Apple, and Tesla, did not secure a spot, detailing specific aspects of their recent earnings reports and financial performance.

‍