This Metric Predicts Outperformance, Trivariate Says. These 22 Stocks Pass the Test.

AT&T has exhibited gross margin growth. (Dreamstime)

This year has been rife with jarring headlines and market swings, making buying long-term winners and sitting out daily changes all the more tempting. Looking for boring stocks is one strategy; another is to focus on expanding gross margins.

Investors can focus on multiple metrics when looking for multiyear compounders, but of four popular options–revenue, gross margins, net margins, and price momentum–Trivariate Research President Adam Parker’s research shows that gross margin growth is the strongest predictor of future stock performance.

Buying stocks in the “top 10% of previous consistent gross margin expansion” resulted in the strongest portfolio performance, he wrote in a Tuesday note.

Price momentum was no slouch, either. Parker’s research showed that top quintile of stocks that consistently beat the S&P 500 in the prior quarter also outperformed—but Parker was more hesitant to trust this indicator, as this pattern mostly shows up more recently since the pandemic.

Net margin growth, he found, was the weakest signal for outperformance.

Using gross margin growth also narrows investors’ options significantly. Of the 383 S&P 500 companies that had at least two straight quarters of year-over-year gross margin expansion in the previous quarter, only 39 have grown gross margins for 12 consecutive quarters—and just 22 are projected to keep doing so next quarter, Parker’s research showed.

Those 22 names, in order of market capitalization, are Amazon.com , AT&T , Eaton Corporation, Amphenol Corporation, TransDigm Group, Airbnb , Coupang, Electronic Arts , Hubspot, Expedia , Nutanix, Fortive Corp., Carlisle Companies, Aecom, TechnipFMC, APi Group Corporation, Carpenter Technology Corporation, American Homes 4 Rent, ATI Inc., Kyndryl Holdings, Regal Rexnord Corporation, and Henry Schein.

It’s an eclectic group, which is likely a bonus to those investors who are looking for stocks beyond the artificial intelligence trade.

Although summer is drawing to a close, investors can keep the breezy, fuss-free nature of the season alive with “set it and forget it portfolio” management. These stocks might be one way to do so.

Write to Teresa Rivas at teresa.rivas@barrons.com