Earnings: The Indispensable Element Of Great Stocks
Research shows that earnings growth is the single most
important indicator of a stock's potential to make a
big price move. In this lesson, you'll learn how to
find the companies with the best earnings growth and
avoid some pitfalls that trick many investors.
Why Earnings Growth Is So Crucial
How many times have you kicked yourself for passing
up a great stock like Microsoft or Home Depot? There
were tell-tale signs that these winners were about to
make major moves before they became household names.
Yahoo surged 458% in seven months starting September
1998. Right before this phenomenal move, Yahoo reported
three quarters of earnings growth of 400%, 500% and
800% - clear indications that this stock was building
a strong track record and poised for further growth.
Mindspring surged 237% in five months starting November
1998. In the three quarters prior to this, it reported
earnings growth of 140%, 233% and 800%, respectively.
Brooktrout Technology Inc.
Brooktrout Technology Inc., a maker of software and
hardware for networks and telecommunications systems,
catapulted 230% over 23 weeks starting in December 1995.
The three quarters before this great move saw earnings
growth of 31%, 47% and 100%.
See a pattern here? A study of the greatest stock market
winners dating back to 1953 looked at all the biggest
stock winners - stocks that doubled, tripled, and even
went up even more. This was a comprehensive study that
analyzed every fundamental and technical variable. What
emerged were seven common characteristics among the
big winners with earnings growth being the most significant
factor. (The other winning factors from the study are
discussed in subsequent course lessons.)
Three out of four companies averaged earnings increases
of 70% or more in the quarter right before they started
to make a huge price move.
Three-quarters of these top stocks showed at least
some positive annual growth rate over the five years
before their major price move.
This research continues today, and consistently confirms
the original findings about the significance of strong
earnings growth. The study also reinforces that under
countless market conditions over the years, the selection
criteria still work today when searching for winning
stocks. When it comes to investing, start with a look
at a company's quarterly and annual earnings record.