This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Cramer's Action Alerts PLUS - See his portfolio and get alerts BEFORE every trade. Learn more NOW!

Profit Margins: When Is Greed No Longer Good?

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- In Oliver Stone's 1987 film, Wall Street, business mogul Gordon Gekko (portrayed by Michael Douglas in an Oscar-winning performance) extolled the virtues of greed:

Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge, has marked the upward surge of mankind and greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the U.S.A.

When Wall Street was first released, clever Gekko-wannabees quickly reduced Gekko's tirade to a three-word slogan: "Greed is good." Even the collapse of WorldCom and Enron weren't enough to drive that phrase out of popular parlance, or out of the minds of ambitious financiers. Quarter-over-quarter profits became commonly expected and executives who failed to consistently produce double-digit profit margins saw their corporations' stock prices hammered in the markets.

Now, however, as the economic downturn lingers, unemployment hovers at 9% and America's cities are jammed with Occupy Wall Street protestors, it's time to ask another question: even if greed is good, at what point does it cease to be so? When do high profit margins stop being a benefit of wise corporate stewardship and become evidence of avarice run amok?

The answer probably depends on how the profits are used. A company that generates double-digit profits can use them to grow the business, develop innovative products and create more jobs.

For example, in 1999, Intuitive Surgical (ISRG - Get Report) created and introduced a robotic-assisted minimally invasive surgery system. Intuitive Surgical reports that it has since expanded its installed base to more than 1,450 hospital sites, providing technological and procedural innovations across a range of surgical disciplines. The company has reportedly also sustained annual growth in excess of 25%. It's a good news story that has earned Intuitive Surgical on CNN Money's 2010 list of rising stars and has probably also saved a lot of lives.

But when double-digit profits get paid out in hefty executive bonuses or dividends to already wealthy investors or, worse, get hoarded against another economic downturn, the news is far less positive.

For example, despite increasingly strident news coverage some companies continue to pay tens of millions to their CEOs each year, in some cases increasing their annual compensation by magnitudes of three times or more. Perhaps it's not surprising in the banking sector -- JP Morgan Chase (JPM), Goldman Sachs (GS) and US Bancorp (USB) all gave their CEOs massive raises this year.

1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
ISRG $500.00 0.00%
AAPL $128.46 0.00%
FB $78.97 0.00%
GOOG $558.40 0.00%
TSLA $203.34 0.00%

Markets

DOW 18,132.70 -81.72 -0.45%
S&P 500 2,104.50 -6.24 -0.30%
NASDAQ 4,963.5270 -24.3630 -0.49%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs