Page 281 - How to Make Money in Stocks Trilogy

C = Current Big or Accelerating Quarterly Earnings and Sales per Share 159

slow down significantly. If a company that has been growing at a quarterly
rate of 50% suddenly reports earnings gains of only 15%, that might spell
trouble, and you may want to avoid that company.
Even the best organizations can have a slow quarter every once in a while.
So before turning negative on a company’s earnings, I prefer to see two con-
secutive quarters of material slowdown. This usually means a decline of
two-thirds or greater from the previous rate—a slowdown from 100% earn-
ings growth to 30%, for example, or from 50% to 15%.

Consult Log-Scale Weekly Graphs
Understanding the principle of earnings acceleration or deceleration is
essential.
Securities analysts who recommend stocks because of the absolute level
of earnings expected for the following year could be looking at the wrong set
of numbers. The fact that a stock earned $5 per share and expects to report
$6 the next year (a “favorable” 20% increase) could be misleading unless
you know the previous trend in the percentage rate of earnings change.
What if earnings were previously up 60%? This partially explains why so few
investors make significant money following the buy and sell recommenda-
tions of securities analysts.
Logarithmic-scale graphs are of great value in analyzing stocks because
they can clearly show acceleration or deceleration in the percentage rate of
quarterly earnings increases. One inch anywhere on the price or earnings
scale represents the same percentage change. This is not true of arithmeti-
cally scaled charts.
On arithmetically scaled charts, a 100% price move from $10 to $20
shows the same space change as a 50% increase from $20 to $30. But a log-
scale graph shows a 100% increase as twice as large as the 50% increase.
Weekly charts in Daily Graphs Online are properly logarithmic.
As a do-it-yourself investor, you can take the latest quarterly earnings per
share along with the prior three quarters’ EPS, and plot them on a logarith-
mic-scale graph to get a clear picture of earnings acceleration or decelera-
tion. For the best companies, plotting the most recent 12-month earnings
each quarter should put the earnings per share point close to or already at
new highs.

Check Other Stocks in the Group
For additional validation, check the earnings of other companies in your
stock’s industry group. If you can’t find at least one other impressive stock