Page 278 - How to Make Money in Stocks Trilogy

156 A WINNING SYSTEM

while net income may be up 12%, earnings per share—your main focus as
an investor—may have edged up only 5% or 6%.
You must be able to see through slanted presentations. Don’t let the use
of words like sales and net income divert your attention from the truly vital
facts like current quarterly earnings. To further clarify this point:
You should always compare a company’s earnings per share to the same
quarter a year earlier, not to the prior quarter, to avoid any distortion
resulting from seasonality. In other words, you don’t compare the
December quarter’s earnings per share to the prior September quarter’s
earnings per share. Rather, compare the December quarter to the
December quarter of the previous year for a more accurate evaluation.

Omit a Company’s One-Time Extraordinary Gains
The winning investor should avoid the trap of being influenced by nonre-
curring profits. For example, if a computer maker reports earnings for the
last quarter that include nonrecurring profits from activities such as the sale
of real estate, this portion of earnings should be subtracted from the report.
Such earnings represent a one-time event, not the true, ongoing profitabil-
ity of corporate operations. Ignore the earnings that result from such events.
Is it possible that the earnings of New York’s Citigroup bank may have
been propped up at times during the 1990s by nonrecurring sales of com-
mercial real estate prior to the bank’s later leveraged involvement in the
subprime disaster?

Set a Minimum Level for Current Earnings Increases

Whether you’re a new or an experienced investor, I would advise against
buying any stock that doesn’t show earnings per share up at least 18% or
20% in the most recent quarter versus the same quarter the year before. In
our study of the greatest winning companies, we found that they all had this
in common prior to their big price moves. Many successful investors use
25% or 30% as their minimum earnings parameter.
To be even safer, insist that both of the last two quarters show significant
earnings gains. During bull markets (major market uptrends), I prefer to
concentrate on stocks that show powerful earnings gains of 40% to 500% or
more. You have thousands of stocks to choose from. Why not buy the very
best merchandise available?
To further sharpen your stock selection process, look ahead to the next
quarter or two and check the earnings that were reported for those same