After the financial and economic implosion of 2008, many companies were forced to implement drastic operational changes to stay competitive and profitable. That included increasing productivity, reducing labor resources and lowering capital spending to build cash and liquidity. These strategies had a big effect on earnings, and now the S&P 500 is on the cusp of returning to peak earnings last seen in 2007.
But while that big rebound in earnings has been great for stocks (the S&P 500 has more than doubled from its low in March 2009) it also has the private sector sitting at the top of a multi-year expansion in margins and record profitability.
Take The Coca-Cola Company (NYSE:KO), for example. The company’s operating margin exploded higher out of the recession in 2009 all the way through 2011, climbing from a 10-year average of 21% to an all-time high above 33% in July of 2011.
What Coke and other big companies found out during the recession is that they could get by with fewer labor resources and increase earnings through simple margin expansion. But now, that three-year margin cycle is showing signs of topping off.
If even big companies like Coca-Cola are struggling to expand margins any further, then mid and small caps — which have less pricing power — are in even deeper trouble. These companies and executives have squeezed everything they can out of spending and labor costs, so future earnings growth will have to be driven by new revenue. The thing is, mid- and small-cap companies have more room to growh, so they are able to post stronger gains than slow-growing blue chips.
Therefore, to enjoy the highest possible returns next year, investors should be focusing on mid- and small-cap stocks with strong projected revenue growth. Here are four companies that fit the bill, with expected sales growth of more than 100% in 2013.