The correct answer is      (B.) ITT Educational Services

The recession has prompted companies to implement cost-cutting measures -- sometimes drastic measures -- to survive. Though that makes for tough times, cutting out the fat also sets many companies up for incredible profits as the economy recovers. After all, expenses may increase, but when revenues increase even more, the result is huge gains in operating margins and cash flow.

That's been the case for ITT Educational Services (ESI). ITT is one of the nation's premier for-profit education providers. So far this year, revenues have climbed +25%, but expenses are only up +15%. As a result, operating margins have expanded a remarkable 580 basis points (to 36%) and free cash flows have swelled by +167%. Clearly management likes what it sees, and the company has confidently lifted its full-year outlook.

ITT is doing well because tens of thousands of displaced jobseekers are looking to gain new skills and strengthen their resume -- and most understand the surest path to career advancement is through a degree. Through a nationally accredited network of 105 campuses spread throughout 35 states, ITT offers everything from technical training and associate degrees to masters programs. The sector was one of the market's brightest performers last year, and ESI schooled the S&P by about 50 percentage points.

Aside from hiring new faculty members to accommodate larger classes, ITT's variable costs are practically nil and fixed expenses can be spread thinner as enrollment grows. In other words, once the infrastructure is in place, each new student brings in almost nothing but profit -- to say nothing of the fact that tuition rates march sharply higher each year. And over the past three months, ITT has enrolled 19,692 new students, which brings the total student population to nearly 70,000.

It's no secret that investors place a premium on lofty margins like those of ITT. If one business squeezes $0.15 in earnings from each dollar in sales and another manages just $0.10, the first company clearly has a big advantage. After all, there's only one thing better than a healthy profit margin: an expanding one. That's why StreetAuthority editors Paul Tracy and Nathan Slaughter dove deep into the market looking for companies positioned to convert new revenues into pure profit. If you think ITT is all they found, think again. In this month's issue of the Market Advisor newsletter, Paul and Nathan highlight another stock whose margins have blossomed to nearly 40% -- nearly twice that of its competitors -- simply by being the best at holding costs in check. To learn the name of this stock, and to learn more about Market Advisor, please visit this link.