Page 279 - How to Make Money in Stocks Trilogy

C = Current Big or Accelerating Quarterly Earnings and Sales per Share 157

quarters the previous year. See if the company will be coming up against
unusually large or small earnings achieved a year ago. When the unusual
year-earlier results are not caused by seasonal factors, this step may help you
anticipate a strong or poor earnings report in the coming months.
Also, be sure to check consensus earnings estimates (projections that
combine the earnings estimates of a large group of analysts) for the next sev-
eral quarters—and for the next year or two—to make sure the company is
projected to be on a positive track. Some earnings estimate services even
show an estimated annual earnings growth rate for the next five years for
many companies.
Many individuals and even some institutional investors buy stocks whose
earnings were down in the most recently reported quarter because they like
the company and think that its stock price is “cheap.” Usually they accept
the story that earnings will rebound strongly in the near future. In some
cases this may be true, but in many cases it isn’t. Again, the point is that you
have the choice of investing in thousands of companies, many of which are
actually showing strong operating results. You don’t have to accept promises
of earnings that may never occur.
Requiring that current quarterly earnings be up a hefty amount is just
another smart way for the intelligent investor to reduce the risk of mistakes
in stock selection. But you must also understand in the late stage of a bull
market, some or even many leaders that have had long runs can top out even
though their current earnings are up 100%. This usually fools investors and
analysts alike. It pays to know your market history.

Avoid Big Older Companies with Maintainer Management

In fact, many older American corporations have mediocre management that
continually produces second-rate earnings results. I call these people the
“entrenched maintainers” or “caretaker management.” You want to avoid
these companies until someone has the courage to change the top execu-
tives. Not coincidentally, they are generally the companies that strain to
pump up their current earnings a still-dull 8% or 10%. True growth compa-
nies with outstanding new products or improved management do not have
to inflate their current results.

Look for Accelerating Quarterly Earnings Growth

Our analysis of the most successful stocks also showed that, in almost every
case, earnings growth accelerated sometime in the 10 quarters before a tow-
ering price move began. In other words, it’s not just increased earnings and