Everyone wants to own a great business.
Far fewer actually do.
Long-term stock market returns have historically been driven by a surprisingly small group of companies. A landmark study by Hendrik Bessembinder at Arizona State University found that just four per cent of U.S. stocks accounted for the majority of net wealth creation between 1926 and 2016.
In other words, most stocks did not meaningfully outperform Treasury bills. A small minority created enormous value.
In the latest episode of Ticker Take on YouTube, I spoke with investor Paul Harris of Harris Douglas Asset Management about how he tries to find that small minority. His approach is built around five financial metrics he believes investors should never ignore.
They are:
- Gross margin
- Operating margin
- Return on invested capital
- Free cash flow
- Interest coverage ratio
Each metric tells part of the story. Together, Harris says, they reveal whether a company has pricing power, operational discipline, efficient capital allocation, durable cash generation, and a balance sheet strong enough to withstand downturns.
And he’s not just looking for companies that score well today. He wants businesses that consistently outperform peers and improve these metrics over time.
Here are six stocks he believes meet that test.
Alphabet
Alphabet, the parent company of Google, continues to generate dominant margins in search while expanding its cloud and AI capabilities. Harris points to its strong free cash flow and fortress balance sheet. High gross margins and improving operating efficiency reinforce what he views as a durable competitive advantage.
Amazon
Amazon’s retail margins have historically been thin, but its cloud business has reshaped the company’s profitability profile. Harris highlights improving operating leverage and significant free cash flow generation. As efficiency initiatives continue, return on invested capital has strengthened.
Visa
Visa stands out for its consistently high margins and capital-light model. Because it operates a global payments network rather than lending directly, it generates substantial free cash flow and maintains strong interest coverage. Harris views it as a classic scalable, high-return business.
FirstService Corporation
FirstService operates in residential property management and essential services. Harris sees steady margin performance and disciplined capital allocation through acquisitions. Its recurring revenue base supports reliable cash flow, a key part of his framework.
Bank of America
Large banks may not immediately come to mind when investors think about high-margin businesses. Harris argues scale and diversification matter. Bank of America benefits from multiple revenue streams, improving efficiency ratios, and strong capital levels. Consistent profitability and solid interest coverage support its inclusion.
Meta Platforms
Meta remains one of the most profitable large-cap technology companies. Even while investing heavily in artificial intelligence and infrastructure, it continues to generate substantial operating margins and free cash flow. Harris says its ability to fund growth internally while maintaining financial strength makes it stand out.
The Ticker Take
Finding a great business is harder than it sounds.
Bessembinder’s research shows only a small fraction of stocks drive long-term wealth creation. Harris’s five-step framework is designed to narrow the field by focusing on profitability, efficiency, cash generation, and balance sheet strength.
For investors navigating a market full of noise, those fundamentals may matter more than ever.
Jon Erlichman is a BNN Bloomberg contributor and the host of Ticker Take on YouTube.
