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High vs. Low Margins

Intuitively, you'd surmise that it's a good idea to pick the most profitable company in an industry. That strategy works for growth investors, especially when analyzing competing firms in fast-growing emerging markets. But value investors should take the opposite view, that is, seek out companies with margins below industry, or better yet, their own historical averages.

For instance, Albertsons, Kroger, and Safeway are the three major U.S. nationwide grocery chains, and they compete head-on in many markets. Table 11-12 shows each firm's operating margins for 1992 through 2000. The table also lists each company's average price/sales ratio to show how the market valued their shares over the years shown.


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