Page 283 - How to Make Money in Stocks Trilogy

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• C HAP T E R •

A = Annual Earnings Increases:

Look for Big Growth

Any company can report a good earnings quarter every once in a while. And as
we’ve seen, strong current quarterly earnings are critical to picking most of
the market’s biggest winners. But they’re not enough.
To make sure the latest results aren’t just a flash in the pan, and the com-
pany you’re looking at is of high quality, you must insist on more proof. The
way to do that is by reviewing the company’s annual earnings growth rate.
Look for annual earnings per share that have increased in each of the last
three years. You normally don’t want the second year’s earnings to be down,
even if the results in the following year rebound to the highest level yet. It’s
the combination of strong earnings in the last several quarters plus a record
of solid growth in recent years that creates a superb stock, or at least one
with a higher probability of success during an uptrending general market.

Select Stocks with 25% to 50% and
Higher Annual Earnings Growth Rates

The annual rate of earnings growth for the companies you pick should be
25%, 50%, or even 100% or more. Between 1980 and 2000, the median
annual growth rate of all outstanding stocks in our study at their early
emerging stage was 36%. Three out of four big winners showed at least
some positive annual growth over the three years, and in some cases the five
years, preceding the stocks’ big run-ups.
A typical earnings-per-share progression for the five years preceding the
stock’s move might be something like $0.70, $1.15, $1.85, $2.65, and $4.00.

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