High margins...good over time, bad over time?
Now, you may be thinking, how could high margins possibly be bad over time?
Well, what if the company is the clear leader in its field, like apple. I constantly hear people sayign apple can not keep its wide margins up forever. If you took economics in college you were told this as well. If a field has super high margins, people will flood the field, bringing the margins down to the point where economic profits are zero.
So if you have two companies trading at a p/e of 15, both earning the same amount of net income, do you take the high margin one or low margin? High margin is good because they have more flexibility if we hit a slowdown/recession or if the company has a short term problem.
Low margin, however, may be better, because it may be a company in a field that is already flooded. If the high margin company starts to get flooded, its margins will go down, and it will have a lower net income than the low margin company.
Never saw this argument presented before, just thought of it. I don't have an opinion yet. Thoughts?