This week I want to focus on Sales Growth and Profit Margins.

While everybody understands sales, margins might bring up a few question marks.

And with this earnings season essentially over, now is the perfect time to look at this.

So let’s start at the beginning: first and foremost, sales are THE most important thing to a company. Everything else stems from that. Without sales, there really wouldn’t be anything else to analyze. And Sales Growth numbers show you how that company is growing.

However, just because sales are increasing, doesn’t always mean that profits are increasing too. Sales at the expense of profits does not work. So paying attention to Profit Margins is the next thing we’re going to want to look at.

Margin is simply a ratio and the calculation is:

Net Income divided by Sales

So if a Company’s margin is 15% for instance, that means the Company’s net income is 15 cents for every $1 dollar of sales it makes.

But if a Company’s expenses are growing faster than their sales, this’ll reduce their margins.

In general, a company with increasing margins is becoming more profitable and is better managed, i.e., their costs are under control.

So continue to look at their sales numbers. And of course, look at their earnings too. But take a look at their profit margins as well. Are they going up or down? In other words, are they making more money on each dollar of sales they make, or less? This is important stuff to know, and can make a huge difference in your portfolio’s bottom line.

Parameters for this week’s screen:

• 12 Month Trailing Sales Growth (Current / 1 Quarter Ago) greater than their relevant Industry median (Looking for the top companies in their industries.)
• Current Net Margin greater than or equal to 5 Yr. Avg. Net Margin (Steady to increasing Net Profits is what we’re after.)
• Current Net Margin greater than or equal to Net Margin from 1 Quarter Ago (If a company’s profit margin fell last quarter, there’s a chance it might fall yet again. So we’re excluding those companies whose margins fell in the previous quarter.)
• Zacks Rank equal to 1 (Strong Buy) (Only the top Zacks Ranked stocks can get thru.)

Here are 5 stocks that passed this screen this week for 12/26/12:

AWR American States Water
FAF First American Financial
MDC M.D.C. Holdings
SMP Standard Motor Products
TYL Tyler Technologies

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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.