Buy stock 'compounders' for the long-term and tune out any near-term noise, Trivariate Research says

The S&P 500 closed above 6,500 for the first time, capping a multi-day rally despite early-week volatility. Amid ongoing market concerns, Trivariate Research advises investors to focus on 'compounders,' specifically identifying companies with consistent gross margin expansion over 12 consecutive quarters as key long-term outperformers. This strategy, aimed at mitigating volatility, highlights examples such as Amazon, Eaton, and Coupang, which demonstrate robust and sustained gross margin growth.

Analysis

Despite market volatility that saw early-week selloffs, the S&P 500 rallied to close above 6,500 for the first time, signaling underlying strength tempered by investor caution. Amid concerns over the tech rally's durability, tariffs, and monetary policy, Trivariate Research advocates for a defensive strategy centered on identifying long-term "compounders." Their analysis indicates that consistent gross margin expansion is the most effective predictor of subsequent stock performance, outperforming revenue growth, net margin growth, and price momentum. The firm's screen identified companies with 12 consecutive quarters of gross margin growth, with 22 of them forecast to continue this trend. Key examples include Amazon (AMZN), with a 48.85% annual gross margin, although its shares have lagged some "Magnificent 7" peers and it issued light operating income guidance. Electrical equipment maker Eaton (ETN) has surged 21% in six months as a data center play and retains strong analyst support despite a weak Q3 outlook. E-commerce platform Coupang (CPNG) has seen its shares jump over 28% year-to-date, having expanded its gross margins by 4.8 percentage points over the last two years, highlighting the tangible results of this quality-focused investment thesis.

Key Decisions for Investors

• Investors should consider screening for companies demonstrating sustained, multi-quarter gross margin expansion as a defensive tactic to mitigate risks from market volatility and macro-economic uncertainty.
• Evaluate specific names highlighted for margin growth, such as Eaton (ETN) and Coupang (CPNG), but weigh positive fundamentals against company-specific headwinds like Eaton's disappointing Q3 outlook before initiating or adding to a position.
• For mega-caps like Amazon (AMZN), assess whether its consistent gross margin profile, combined with its relative stock underperformance and softer near-term guidance, presents a value opportunity within the long-term compounder framework.