Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / How to Spot a Stock with Pricing Power Using Gross Margin Trends
Transcript
- Lucas: Meta up almost 13 percent in the last five trading days. That's the kind of move that makes you ask whether the company has something the market just recognized — pricing power in digital ads. Luna: Thirteen percent in a week — that's not a slow build, that's a repricing. But when you say pricing power, I think of companies that can raise prices without losing customers. Meta raises ad prices by changing the algorithm, not by sending a letter. Lucas: Exactly. And that's the angle I want to spend today on — how to spot a stock that genuinely has pricing power, using a single metric: gross margin trend. Not the level, the trend. Because if a company can expand its gross margin over a cycle, it's telling you it has pricing power, cost advantages, or both. Luna: Let me stop you there. If our money conversations have helped you think about a decision differently — whether it's a stock you researched, a fee you negotiated, or how you allocate your savings — we'd love it if you considered supporting the show. We deliberately don't run ads on these. If you want to support that choice, the link is buy me a coffee dot com slash fexingo. Lucas: That's right. And honestly, it's listeners like you who keep this conversation going without a sponsor reading a script about mattresses or meal kits. So thank you for that. Now back to gross margins — because I want to make this really concrete. Luna: Good. So give me a company that shows this trend clearly. Lucas: Let's use Coca-Cola. Everyone knows the brand, but few people look at its gross margin trajectory. Over the last decade, Coke's gross margin has expanded from roughly 60 percent to over 63 percent. That's 300 basis points. Doesn't sound huge, but on $45 billion in revenue, that's an extra $1.35 billion in gross profit every year. Luna: And that's before any volume growth. So the pricing power is baked into the margin expansion. They raise prices, customers barely flinch, and the extra drops straight to the bottom line. Lucas: Precisely. Now contrast that with a company that has pricing power but a different profile — Sherwin-Williams. Their gross margin is around 45 percent, but it's been remarkably stable even through raw material cost spikes. In 2021 and 2022, when input costs surged, Sherwin-Williams actually expanded gross margin by about 100 basis points because they passed through price hikes quickly. Luna: That's the opposite of what you'd expect. Usually when input costs go up, margins compress. But Sherwin-Williams could double down on price increases because contractors don't have an alternative brand they trust as much. Lucas: Right. So the gross margin trend tells you about the moat. A stable or expanding gross margin during inflation is a huge signal. Now, the reason this matters right now — as of July 2, 2026 — is that the market is rotating out of pure momentum and back into quality. The S&P 500 is at 7,483, up 1.7 percent in five days, but the Russell 2000 is flat. Money is flowing to companies with demonstrated pricing power. Luna: And the megacap selloff we've seen earlier this year — that made investors look for companies that can defend margins without relying on growth at any cost. Lucas: Exactly. Now let's talk about how to calculate gross margin. It's simply revenue minus cost of goods sold, divided by revenue. You can find COGS on the income statement. For a software company, COGS might be hosting and support. For a manufacturer, it's raw materials and labor. The trend line over five years is what you want. Luna: But what about companies like Apple? Their hardware gross margin is around 38 percent, but their services gross margin is over 70 percent. So the blended margin is rising as services become a bigger share. Is that pricing power or mix shift? Lucas: Both, honestly. The mix shift itself is a form of pricing power — they built a platform that lets them capture recurring revenue at high margins. But if you look at Apple's overall gross margin, it's gone from about 38 percent in 2015 to over 44 percent today. That's 600 basis points of expansion driven partly by pricing on hardware — think of the iPhone Pro price increases — and partly by services. Luna: So the metric works for both product and platform companies. But what about a company like Meta, which just surged 13 percent? Meta's gross margin has actually compressed slightly over the last few years, from around 82 percent to 81 percent. That's not expansion. Lucas: That's a fair point. Meta's gross margin compression is mostly due to higher infrastructure costs — data centers, AI compute. So gross margin trend may be less useful for companies in heavy investment mode. But the market is pricing Meta based on future margin expansion once those investments pay off. So it's not a contradiction — it's just that the gross margin trend is a lagging indicator of pricing power, not a leading one. Luna: So when you screen for stocks, you want to see gross margin that's either stable or expanding over a five-year period, ideally through different economic conditions. Lucas: Yes. And I'd add one nuance: look at gross margin versus peers. If a company's gross margin is higher and more stable than competitors, that's a sign of pricing power. For example, in the beverage space, Coke's gross margin is about 60 percent, while PepsiCo's is around 55 percent. That 500 basis point gap is durable. Luna: And that gap persists even when input costs change. So it's really about the competitive moat. Lucas: Exactly. Now, let's tie this back to the current market environment. With the S&P 500 near all-time highs and the Nasdaq up 2.7 percent in five days, a lot of stocks look expensive on a price to earnings basis. But if you find companies with expanding gross margins, you're essentially finding businesses that can grow earnings faster than revenue — and that's how you get the compounding that justifies a higher multiple. Luna: So the gross margin trend gives you a forward-looking indicator of earnings quality, not just valuation. Lucas: Right. And that's the kind of edge you need when building a concentrated portfolio. You're not buying 50 stocks, you're buying maybe 10 or 15. Each one needs a clear, durable advantage. Gross margin trend is one of the quickest ways to check if that advantage is real. Luna: So if I'm a listener sitting at home with a stock screener, what's the practical step? Lucas: First, pull the income statement for the last five fiscal years. Calculate gross margin for each year. If it's rising or stable, put the stock on your watchlist. Then check against peers. If it's falling, ask why. If the reason is investment — like Meta's data centers — that might be okay. But if it's because of pricing pressure from competitors, that's a red flag. Luna: And what about companies like Berkshire Hathaway — ticker symbol B-R-K-B — which is up 2.4 percent in five days. Their gross margin isn't really applicable because it's a conglomerate. Lucas: Right. For conglomerates, you'd need to look at each subsidiary's margins separately. But for most individual equities, gross margin is a clean starting point. And the beauty is that it's not a crowded signal. Most retail investors focus on earnings per share or revenue growth. Gross margin trend is less common, so it can give you an edge. Luna: That's a good note to end on. So the takeaway: pricing power is visible in the gross margin trend. Look for expansion or stability over five years, especially through inflationary periods. Lucas: And if you find a stock with that profile trading at a reasonable price to earnings ratio, you might have found a candidate for your concentrated portfolio. That's it for this episode.