Tuesday, January 12, 2021
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Companies with high operating leverage have been beating the market.
Back in December, we unveiled what we expected to be the buzziest market phrase of 2021 — operating leverage.
Operating leverage can be defined many ways and with a variety of particulars, but the simplest explanation is that operating leverage dictates how much a company can grow sales without increasing expenses.
The better a firm’s operating leverage, the higher future profit margins are expected to be as incremental revenue grows more profitable over time.
And over the last few months, investors placing bets on companies’ ability to exercise this leverage have been beating the broader market soundly.
In a note to clients published over the weekend, the equity strategy team at Goldman Sachs included the following chart, showing that since November 6 this bucket has outperformed the S&P 500 by 9 percentage points.
Companies in Goldman’s high operating leverage bucket include salesforce.com (CRM), Ford (F), PVH (PVH), Disney (DIS), and Twitter (TWTR).
On Nov. 9, Pfizer (PFE) and BioNTech (BNTX) first announced their COVID-19 vaccine candidate was found to be more than 90% effective in a Phase 3 trial. Since this announcement, additional developments on both Pfizer’s vaccine and a vaccine from Moderna (MRNA) have revealed even greater efficacy. Both were eventually approved for use by the FDA.
But this initial Pfizer/BioNTech news — which came just a day after most major news outlets called the presidential election for Joe Biden — is what really kickstarted the market rally we’ve seen take hold over the last few months.
Because while vaccine rollouts continue to frustrate and disappoint, the results of the Georgia Senate races and the promise these treatments offer in ending the most acute phase of the pandemic this year have gotten investors quite excited.
Call it the re-opening trade, the reflation trade, a combination of both or neither, what’s clear in the market’s action over the last few months is that investors think better days are ahead. More spending, more movement, and more normalization of economic activity in the U.S. has been and continues to be anticipated by markets.
And investors have pegged as winners the set of companies that might not have to do anything to benefit from this change in the status quo.
Otherwise known as firms that exhibit strong operating leverage.
By Myles Udland is a reporter and anchor for Yahoo Finance Live. Follow him at @MylesUdland
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