John Dorfman: Adobe, Applied Materials stand out for fat profit margins

High profits are the engine that can drive pleasant returns for shareholders.

Beyond that, on a societal level, profits provide the signals that make the capitalist system work. These signals are the reason capitalist economies have fewer gluts and shortages than centrally planned (Communist) economies.

High profits lure new competitors, raising the supply of goods and services that are in high demand. Low profits cause some companies to abandon the field, in a process economist Joseph Schumpeter called “creative destruction.” This is why we currently don’t have a glut of buggy whips or video cassettes.

Here are five stocks that boast unusually high profit margins and that I think deserve consideration as investments.

Adobe

You may know Adobe Inc. (ADBE) as the company whose software enables the display of graphics on your computer screen. Adobe has increased its sales at a 20% annual clip for the past decade, and profits have grown even faster.

Adobe’s growth slowed in the past year, but the growth rate was still nicely into the teens. The company’s net (after tax) profit margin is 30%. The stock trades for 22 times recent earnings but only 15 times analysts’ estimate of earnings for 2026.

I try not to be too influenced by personal experiences, but I have found Adobe’s customer service to be superb.

Applied Materials

One of the world’s largest makers of semiconductor manufacturing equipment, Applied Materials Inc. (AMAT) is based in Santa Clara, Calif. Its sales growth over the past decade has been north of 17% a year. Its net profit margin is close to 24%.

Although the stock has appreciated more than 900% in the past 10 years, so far this year it’s down a small fraction. I think the weakness mostly reflects the U.S.-China trade conflict. Applied Materials gets about 25% of its sales in China.

Anglogold Ashanti

Based in Denver, Colo., Anglogold Ashanti Plc (AU) is a gold mining company. Most of its mines are in Africa, but it also has mines in Australia and the Americas. The price of gold has risen more than 40% in the past year, amid government deficits, inflation and international tensions.

I think those problems will continue through 2026 and that gold’s momentum therefore will continue as well. Anglogold Ashani has a net profit margin of more than 23%.

United Therapeutics

United Therapeutics Corp. (UTHR), based in Silver Spring, Md., is known mainly for drugs to treat high blood pressure in the arteries around the lungs. I’ve owned the stock a couple of times over the years and regret that I haven’t owned it this year, since it jumped 33% in the past month.

I sold my shares in 2024 because I thought Merck & Co. might wrest away leadership in its niche. So far that hasn’t happened, and United Therapeutics also is developing drugs outside its traditional niche, such as treatments for liver and kidney disease. Its net margin is 40%.

Zoom Communications

Zoom Communications Inc. (ZM) had first-mover advantage in the market for online meetings software. Lately, Microsoft Teams and Google Meet have chipped into its market share. Zoom’s growth — spectacular during the pandemic — has flattened out.

Nonetheless, Zoom remains a significant player in online meetings, with roughly half the market. Its net profit margin is a fat 25%. The stock, which rose above $500 in 2020, has subsided to $83, and I think it is probably a good buy at the current price.

Performance

I’ve written 15 columns before this one on stocks with fat profit margins. Results have been mixed and strange, but a little more good than bad.

The average 12-month return on my recommendations has been 16.3%. That beats the average return for the Standard & Poor’s 500 Total Return index over the same periods, which was 15.8%.

Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.

The odd thing is that my picks, while profitable 10 times out of 15, have beaten the index only four times. My average return beat the benchmark mainly because of great returns from 2014-2015 (83.2%) and 2020-2021 (78.6%).

My picks from a year ago didn’t get traction. They were up only 0.1%, trailing the S&P by 15 percentage points, mostly because of a 37% loss in ON Semiconductor Corp. The best gainer was Snap-on Inc. (SNA), which returned 16.9%.

Disclosure: I own Anglogold Ashanti personally and for most of my clients. I own Applied Materials for a few clients.