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How Investors Can Unlock the Power of Profit Margins

Running a business is all about making a profit, so it makes sense that one of the best measures of a company's performance is its profit margins.

Strong profit margins almost always mean a company is well-run, stable, and making money.

A company with healthy profit margins indicates it is efficient at allocating capital and controlling costs, so it can deliver more revenue to the bottom line.

It also means the business has built-in safety. Therefore, a sales slump is less likely to cause an operating loss.

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Stock Market Today: Banks Net Record Profits, But Stocks Slip

The stock market today is trying to end what has been a negative week on a positive note.

Markets have traded down all week on global economic concerns and today are being held back by JPMorgan Chase & Co. (NYSE: JPM) and Wells Fargo & Co. (NYSE: WFC) even though the two financial giants posted record earnings.

Here's what's bringing those stocks down and why consumer sentiment is at a five-year high:

  • Banks slide amid record earnings- JPMorgan and Wells Fargo each reported record quarterly profits but neither stock is surging on the results. Wells reported third-quarter net income of $4.94 billion, or 88 cents per share, up from $4.06 billion, or 72 cents a year ago and JPMorgan announced third-quarter earnings of 5.71 billion, or $1.40 a share, up from $4.26 billion, or $1.02 a share a year earlier. The record results were spurred by homeowners taking advantage of lower interest rates in order to refinance their mortgages. "The one big positive is clearly mortgage origination revenues," Richard Staite, an analyst at Atlantic Equities LLP in London, told Bloomberg News in an interview before results were announced. "Rates will remain at this level or potentially drop further and ultimately that will drive a recovery in the housing market."

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Why Wells Fargo Stock is a Buffett Favorite

Investing in bank stocks has not been for the fainthearted over the past several years.

Many financial institutions are still dealing with the lingering effects of the 2008 financial crisis that left their reputations soiled and have kept scores of market participants at arm's length.

Now, day after day, these banks are still saddled with troubles as they struggle with Eurozone exposure, uncertain global markets, mounting regulatory measures , and the newest scandal -- the Libor manipulation probe.

But there is one big bank that appears to be a bright spot in this otherwise dreary sector: Wells Fargo (NYSE: WFC).

"I like Wells Fargo better than anything by far. We have been buying Wells Fargo month after month for a lot of years. Among the big banks, I think it is the best," financial wizard and Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) CEO Warren Buffett told Bloomberg TV in a recent interview.

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Wells Fargo Stock: On Verge of Earnings Boost?

Investors of Wells Fargo stock (NYSE: WFC) may be smiling come Friday afternoon as the company reports its second-quarter earnings before the opening bell tomorrow morning.

Wells Fargo is expected to announce earnings of 81 cents per share on revenue of $21.32 billion.

A good sign is that analysts' earnings per share projections have increased over the last three months from 80 cents, compared to the abundance of companies lowering guidance.

If Wells is able to post a rise in its profits it will be the fourth consecutive quarter in which the bank has posted a profit increase. It should be able to as those expected quarterly profits are almost 16% higher than a year ago and Wells Fargo is starting to stand out more and more in the recently revived financial sector.

From Barclay's (NYSE ADR: BCS) Libor manipulation scandal, to JPMorgan's (NYSE: JPM) "bet" gone wrong and even back to Morgan Stanley's (NSYE: MS) botching of the Facebook IPO, banks have been in the news for all the wrong reasons lately.

But Wells has avoided a lot of the negative news on banks. It's known for playing it safe compared to its Wall Street rivals.

In fact, Jefferies analyst Ken Usdin called Wells "one of the strongest, most respected U.S. banks" when he initiated coverage of the bank Monday with a "Buy" rating.

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Money Morning Mailbag: BP's Post-Oil-Spill Reputation Leads Readers to Consider Socially Responsible Investing

BP PLC (NYSE ADR: BP) stock plunged 16% to hit a 14-year low in New York trading Wednesday as some investors panicked over growing liabilities and others worried about socially responsible investing.  

In London trading Thursday BP fell 6.7% to 365.50 pence, its lowest closing price since January 2003 and 44% lower than the day the Deepwater Horizon rig exploded.

"The share price is political and in no way fundamental," said Jason Kenney, an analyst at ING Wholesale Banking in Edinburgh. "The U.S. needs to realize it needs BP to survive to clean up the mess. Scapegoating has gone too far."

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Investment News Briefs

With our investment news briefs, Money Morning provides investors with a quick overview of the most important investing news stories from all around the world.

House Rethinks Glass-Steagall; Boeing's Dreamliner Finally Lifts Off; Manufacturing, Wholesale Prices Both Rise; Best Buy Beats Street; GE Sees Flat Revenue; Wells Fargo to Pay Back TARP

  • The Glass-Steagall Act, which barred banks that took deposits from underwriting securities, is under consideration for reinstatement by the U.S. House of Representatives, according to Majority Leader Steny Hoyer, D-MD. A renewal of the 1933 law “is certainly under discussion” by House members, Hoyer told Bloomberg News in Washington. The Glass-Steagall law was repealed in 1999 to help pave the way for the formation of Citigroup Inc. (NYSE: C) with the $46 billion merger of Citicorp and Travelers Group Inc. Enactment of the law has generated debate about whether it helped spawn reckless lending practices and financial speculation that led to the meltdown of credit markets last year and the $700 billion U.S. bailout of troubled banks, including Citigroup. “As someone who voted to repeal Glass-Steagall, maybe that was a mistake,” Hoyer said.

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Banks Threatened as Washington Takes on Overdraft Fees

Charges related to overdrawn accounts this year may add up to $38.5 billion in revenue for banks following last year's $36.7 billion, according to data from research firm Moebs Services Inc. That's up from $28 billion collected in 2007, according to consulting firm Oliver Wyman Group. But sneaky and manipulative ways in which banks collect […]

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Investment News Briefs

With our investment news briefs, Money Morning provides investors with a quick overview of the most important investing news stories from all around the world. Wells Fargo Cut Sends Markets Down; Fed Beige Book Shows Tepid Progress; Obama Administration To Cut Executive Pay at Top TARP Companies by 50%; Boeing Shares Fall After Loss; E-Reader […]

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U.S. GDP Revised Up, but Economic Growth is Unlikely to Gain Momentum

After contracting by 6.4% in the first three months of the year, the U.S. economy shrank just 0.7% in the April-June period. But while many analysts believe growth resumed in the third quarter, any recovery will likely be hamstrung by high unemployment. The U.S. Commerce Department revised its estimate of gross domestic product (GDP) to […]

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Wall Street Back to Business as Obama's Regulatory Overhaul Loses Momentum

It was more than a year ago – Sept. 14, 2008 – that Lehman Bros. Holding Co. (OTC: LEHMQ) finally collapsed under the weight of its own bad investments. But since then, little progress has been made on financial regulatory reform, and many of the large investment banks that received billions of dollars in government […]

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Bank Failures Could Surge as Commercial Real Estate Losses Continue to Mount

The dark cloud of commercial real estate loan defaults is inching closer, threatening to shutter more banks, even as the U.S. Federal Reserve declares the recession to be over. Commercial property values in the U.S. have plummeted 36% since peaking in 2007, and the commercial real estate market is unlikely to recover before 2012, according […]

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U.S. Banks: Why Only the Simplest Will Succeed

One of the most accurate forecasters of the global economic crisis, Nouriel Roubini, said last week that last September's spree of bank takeovers deepened the crisis because it made the already-too-big banks even bigger.

He may well be right; more interesting is what this tells us about the U.S. banking system going forward.

"The institutions are insolvent," Roubini said in a Bloomberg Radio interview. "You have to take them over and you have to split them up into three or four national banks, rather than having a humongous monster that is too big to fail."

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